The Public Economy Public Goods and Public Value
The Public Economy Public Goods and Public Value June Sekera Honorary Senior Research Associate Institute for Innovation and Public Purpose University College London December 12, 2017
The Premise and The Peril
The premise • Public non-market production makes up a major share of all economic activity in modern nationstates. • Certain needs can only be met, and some complex problems can only be solved, through collective effort and shared cost, if our common needs are to be met. • This collective system is the public nonmarket economy, of which government is the agent. however…
The peril • Mainstream economics does not explain, does not even recognize that economic system. • This blindness undermines the public economy system, de-values the public domain and jeopardizes the well-being of people and the planet.
Needed: New conceptual model Reform of economics teaching New foundation for public policy & practice …in order to meet societal needs
“market solutions” to meet public needs
railroads - privatized
water supply privatized
Air Traffic Control – privatized
National Parks “branding rights” – for sale
Vouchers: funnel taxpayer $ to for-profit schools
For-profit universities and colleges whose revenues are >90% taxpayer-funded
Privatize infrastructure – Funded by taxpayers, but revenues to private owners/operators
Commercialize Space
“Run government like a business”
contracting-out
V I Growth of Government-by-Contractor S a submerged para-state I B L Federal Employees Contractors S Contractors U B 1950’s Contractors M E 1990’s R G E 2000’s
Contract workers outnumber government workers Clic
What hasn’t been outsourced or privatized has been marketized
Marketized Government Policing for Profit Social Impact Bonds Municipal bonds Wall St. instead “branding rights” to our National Parks procurement: the “free market farce” Performance Based Pay
students “customers”
Private-to-Public Transplant: the Results • faux competition in a pseudomarket • “free-market farce” of deformed procurement protocols • perversion of purpose: revenue-raising becomes a goal • hollowing-out of public capacity • counter-productive performance measurement
Economics & “The Economy” [i. e. , the market economy]
What mainstream economics says about government / the state
Government “interventions” “distort” the market.
collective action is a “problem” (Mancur Olson)
public goods are a “problem” (of market failure)
price is the determinant of value (zero price “problem”)
the role of the state is only to fix “market failure” problems
The issue exists not just in economics, but also in public administration scholarship.
Public administration theory – • New Public Management (David Osborne) • New Public Service (Robert and Janet Denhardt) • New Public Governance(Stephen Osborne) • Public Value (Mark Moore & Barry Bozeman) all are reliant on market economics theory
fuzziness and blurring • “degrees of publicness” • “all organizations are public” • “An organization is ‘public’ to the extent that it exerts or is constrained by political authority. ” • Barry Bozeman 1980’s to now’s • “Interweaving” Don Kettl; last several years • “meshing” of public and private • “blended workforce” (Paul C. Light)
Rebuttal Ronald Moe 1987 • “Promoters of privatization have been at the forefront of current efforts to mesh the public and private sectors” • “Implicit in the rhetoric of the privatization movement is the view that the public and private sectors are alike, both subject to the same set of economic incentives and disincentives. ”
Rebuttal (contd) Ronald Moe 1987 • Some public administration scholars see “sector blurring” as not only present and inevitable, but desirable, given the complexity of life in general. • This “…fascination with complexity and ambiguity is misplaced” • Leads to …“nearly all public sector activities are potentially amenable to being transferred to the private sector. ”
What Happened? The birth and death of “public economy” • 18 th century Cameralism • 1891 William Folwell, Univeristy of Minn. “public economy should be recognized” • 1937 Musgrave: 2 spheres – market economy and public economy • 1950’s Alan Peacock: a “theory of the public economy” is needed Mid-century “radical shift” • 1969 Public Economics Guitton) But from market perspective (Margolis and • Current: “public economics, ” beholden to market theory.
The idea of a public economy was extinguished by the mid-20 th century. The triumph of rational-choice economics and market-centric “public choice” theory.
“Public Choice” school • Market-model axioms and assumptions apply to the public sector. • Indentured to the market paradigm • Government as an arena for “innumerable individual exchanges” See Stretton and Orchard: Public Goods, Public Enterprise, Public Choice; 1994
“Public Choice” school James Buchanan: From. . . • “Papers on Non-Market Decision-Making” … to - • “public choice economics”
“the state is remade from the foundation of juridical sovereignty to one modeled on the firm” Wendy Brown, Undoing the Demos 2015
The market model does not provide the tools to analyze or understand the public non-market system.
The Void
An analogy – A physics that deals with how things work on land but ignores the reality that things work differently in water.
How come boats don’t have wheels and cars don’t have rudders?
It doesn’t work.
The Void We lack a -- *cohesive *internally consistent *coherent economic logic that explains public production.
“The difficulty lies not so much in developing new ideas as in escaping from old ones. ” John Maynard Keynes
multiple economies There is more than one way to produce things.
MULTIPLE ECONOMIES Nonmarket Economic Systems Mission-driven; Need-driven Non-profit sector Public economy Core economy Agent -- Governments Agent -- Households Market Economic System Private-profit-driven Agent – Firms Agent: voluntary actors
The Public Economy
“Government as a Producer” Paul Studenski 1939
Government is a producer. The result of government activity is products: Public Goods
Public Goods / Public Economy Purpose – satisfy societal needs: • Supply goods or services not supplied by other means; • Solve multifaceted or technologically complex common-needs problems; • Make particular goods or services accessible to all regardless of ability to pay.
Public Goods
Public Goods Personal Safety, Security, Protection Educational Opportunity Health, Fitness and Recreation Physical Infrastructure
Public Goods Business and Commerce Services and Protections Legal System and Legal Protections Individual Rights and Freedoms
Public Goods Communication and Navigation Financial Security and Protections Financial Infrastructure Data and Information
Public Goods Community Services Innovation Cultural, Historic and Heritage Preservation Environmental protection
“Public Goods” the connecting concept… • • • paved streets safe bank accounts protections of treasured public places non-tolled highways rights to associate freely and to speak out foods safe to eat long-view investments in innovation clean air drinkable water net neutrality… and hundreds more…
Government produces: • • products services benefits obligations These are products – tangible and intangible – created from resource inputs via a process which uses governmental machinery that must be built, managed and maintained.
The public economy – a systems perspective
The Public Economy Systemic drivers: • Collective choice (aggregated individual choices; voting) • Collective financing (taxes, money creation, etc. )
MARKET VS. PUBLIC ECONOMY DYNAMICS MARKET EXCHANGE PRODUCTS & SERVICES PRODUCER (firm) CUSTOMER $ Demand-driven Success = Profit PUBLIC ECONOMY CONSTRUCTIVE FLOW PRODUCER (government) POLITY PRODUCTS, SERVICES, BENEFITS, OBLIGATIONS $ $ APPROPRIATION COLLECTIVE PAYMENT AUTHORIZATION (LEGISLATION) ELECTED REPRESENTATIVES COLLECTIVE CHOICE (VOTING) Need - driven Success = Achieving purpose & Meeting need * “Beneficiaries” includes: recipients, users, clients, obligatees © June A. Sekera
THE PUBLIC ECONOMY - DYNAMICS PRODUCTS, SERVICES, BENEFITS, etc. COLLECTIVE CHOICE AUTHORIZATION (LEGISLATION) (VOTING) APPROPRIATION COLLECTIVE PAYMENT (LEGISLATION) Need-driven Success = achieving purpose & meeting need © June A. Sekera
Constructive Flow Far more complex than “exchange” • • Invisibility Submerged state Required rationing Measuring results – Long-term positive externalities – Invisible outcomes – Harms that do not happen
Constructive Flow -advantages Non-rival supply Single-system efficiencies Increasing returns to scale / network effects Uncertainty embraced, so more innovation support • Public financing costs less • Public provision often costs less • •
The Other Void
Mainstream economics: another omission…
CORE (household) economy WASTE ENERGY The Biophysical Basis of All Production
Innovation
solving “wicked” problems; meeting common needs
Markets cannot, or cannot alone, produce certain things: • GPS • Clean air for all • Education for all • Food safety nation-wide For the future: • Distributed renewable energy sources, affordable to all
Why? Market Economy • • Public Economy Short time horizon • Long time horizon Growth as a requisite • Public purpose Uncertainty-averse • Uncertainty is embraced Profits are essential • Collective financing (not profit-driven)
LONG-VIEW INVESTMENT Innovation Chain BASIC RESEARCH APPLIED RESEARCH EARLY STAGE DOWNSTREAM
The Devaluation of “Public” The decades-long campaign to devalue that which is public.
“The Road to Serfdom” Hayek
The corrupted rhetoric of “public” The rhetoric of “public” -co-opted & infused with negativism • “public choice” - anti democracy; anti-public • “public goods” - portrayed as “a problem”
De-valuation of “public” – the results The public nonmarket system has been discredited, de-legitimized, pauperized, privatized, hollowed-out -- “dismembered. ”
Mis-Valuation The GDP Problem #1: the measurement problem Under-valuing public production • Public production value = cost of inputs • Private production value = price of outputs
Mis-Valuation The GDP Problem #2 A category problem A significant portion of “PCE” is publicly financed “public spending [so-called “transfer payments” like Medicare and Social Security] heavily subsidizes personal consumption and raises the level of GDP. In the GDP method, public benefits are not directly counted…. . The key [point]is that the consumption is not private. It is structured by legislation, protected by public agreement and heavily subsidized by government. Clearly, it is public consumption more than private consumption. ” Lew Daly, What is Our Public GDP? 2014
Public Value: the many ways to value “public” • Evident Value • Demonstrated Value • Utility and Scarcity (P. Studenski) • Non-Wasteful Sufficiency (H. Daly) • Aggregated individual value choices
Evident Value Corporate interests perceive public goods as valuable. They value: • railroads (privatize), • public water systems (privatize) • air traffic control (privatize) • highways (toll roads) • space exploration (property rights on the moon)
Demonstrated Value
Demonstrated Value • Multiplier effect of public spending • Crowding-in effects of public investments • Value to firms of public goods like mass education, infrastructure. Reams of evidence have been produced
Demonstrated Value the value of public economy efficiency PPP’s Evaluation no systematic difference in public vs private efficiency; public financing costs less; ergo better value to use the public sector.
Efficiency: no evidence for private efficiency advantage • IMF consistently sceptical on comparative efficiency claims – “While there is an extensive literature on this subject, theory is ambiguous and the empirical evidence is mixed. ”(IMF, March 2004) • Global meta-review of 80+ studies on outsourcing: “it is not possible to conclude unambiguously that there is any systematic difference in terms of the economic effects of contracting out technical areas and social services” (AKF Denmark 2011) – Some signs of efficiency gains in waste, but linked to wage cuts • Analysis compared performance of all European companies privatised between 1980 and 2009 with that of companies which remained public: found, with a high level of statistical significance, that privatised companies did worse than those that remained public, and continued to do so for a period of 10 years: “the privatization group underperforms the group of sectors remaining public”. (Knyezevas and Stiglitz 2013) Dr David Hall; University of Greenwich, PSIRU
Efficiency: across sectors, no evidence of extra private efficiency • Water and waste: Meta-review of 27 econometric studies on comparative public/private efficiency in waste and water various countries: “We do not find a genuine empirical effect of cost savings resulting from private production” (Bel and Warner 2010) • Water, electricity: “no statistically significant difference in efficiency scores between public and private providers. ” (Pollitt 1995, Estache et al, 2005, Warner and Bel 2009) • Buses: no significant difference in efficiency between public and private bus operators, or mixed systems: (Pina and Torres 2006) • Auditing: Australia: ‘outsourced audits are more costly’ (Chong et al 2009) • Prisons: “privately managed prisons provide no clear benefit” (Lundahl et al. 2009 ) • Airports: “Empirical evidence regarding the effects of privatization on the efficiency of airports is scarce and largely inconclusive (Bel and Fageda 2010) • Rail: global review of rail privatisations finds ‘mixed results’ (Beck et al 2013) • Telecoms: global study comparing private and public found: “efficiency growth following privatizations …is significantly smaller than growth in public sectors. ” (Knyazeva, Knyazeva and Stiglitz 2006) • UK privatisations in general: “little evidence that privatisation has caused a significant improvement in performance” (Martin and Parker 1997, Florio 2004)
Value for money: PPPs vs public sector • Cost of capital: always higher for private sector • • Construction ‘on time’: costly ‘turnkey’ contract No efficiency savings Real transaction costs and uncertainty No reduction in public spending under PFI schemes: government pays Factor Comparing Evidence indicates 1 Cost of capital Debt interest + dividends PPP more expensive 2 Cost of construction Comparative costs and completion PPP more expensive/neutral 3 Cost of operation Comparative efficiency Neutral 4 Transaction costs Procurement + monitoring, management PPP more expensive 5 Uncertainty Incomplete contracts, contingent liabilities, impact on service PPP riskier
Demonstrated Value “If there is no systematic difference in efficiency, then it is always better value to use the public sector. ” (Hall, 2017) Simply put: The public economy system costs less and works better (Sekera, Dec. 2017)
Public Value Utility and Scarcity • “government is a productive, wealth-creating organization. It supplies direct utilities as well as aids to private production. ” • “Production consists in the creation of utilities. Government furnishes services and goods which satisfy the two tests of economic value - namely, utility and scarcity. ” Producer” 1939 Paul Studenski “Government as a
Public Value Biophysical-based Value • “Unless we can distinguish better from worse states of the world then it makes no sense to try to achieve one state of the world rather than another. ” We need a policy of “nonwasteful sufficiency. ” (Daly) • Usable energy as the ultimate source of economic value (Odum)
Value Creation in MARKET SYSTEM Products & Services P C $ Value = Price Value Creation in PUBLIC ECONOMY SYSTEM Products, Services, Benefits P ting Law Vo s $ EI $ Value = Meeting Needs B
Public Value: Aggregated individual value choices • “Public Value” as aggregated individual value choices: “collective choice. ” • Public value is contested in the political arena: “differing interests are resolved, and conflict and argument lead to decision and action. ” “Collective conflict has to resolve into collective choice”. (Ranson & Stewart) • In democracies: voting
Public Choice economics “Disabling Democracy” (Stretton and Orchard) • Public choice theory argues against decisionmaking by a democratic majority. (Stretton & Orchard p 151) • the franchise enlarged the welfare state (Tyler Cowen, summarized in Mac. Lean pg 223) • “Arrow…[had virtually] shown that democracy, interpreted as equivalent to majority voting, could not work. ” (James M. Buchanan)
“Public Economics” but beholden to market theory • Courses many • Textbooks e. g. , Economics of the Public Sector; Joseph Stiglitz; 1988, 2000
A new public economics would: • demonstrate the intrinsic value of a form of production besides the market; • be a new foundation for public management.
A new public economics could also… Incorporate the realities of biophysical constraints on production …and shape the policy agenda.
A new public economics: the path forward • Theory: collaboration; conversation & working out a conceptual model of the public economy • Applied theory: developing content – Curriculum – a coherent set of courses – Course syllabi • Teaching economics, public administration, political science, law… Recent and growing interest
“I don’t care who writes a nation’s laws, or crafts its advanced treatises, if I can write its economics textbooks. ” Samuelson
“The difficulty lies not so much in developing new ideas as in escaping from old ones. ” John Maynard Keynes
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