Brittleness, & the public sector

Institutions are brittle. This is one of the big lessons of 2011. The News of the World and the presidencies of Hosni Mubarak and Zine al-Abidine Ben Ali have in common the fact that they looked strong, but suddenly collapsed when they came under strain.
This brittleness has implications for public sector reform.
Take as the starting point Tim’s questions:

How do we get rid of management that fucks up? How do we incentivise those who own the system to hire good managers?
Only when you’ve managed to create a system within the public sector that manages those two tasks do you have an idea that is worth considering.

Now, it is the case that cash incentives tend to be weaker in the public sector  - though penalties for failure are not a ubiquitous feature of the private sector. But there’s something else that can replace these: gift exchange. (Some) public sector workers do huge amounts of unpaid overtime, partly out of what Julian Le Grand calls “knightly motives” such as a sense of vocation. In exchange for this, (some) public sector users put less pressure upon the system by not bothering doctors too much and by not suing them for malpractice.
But here’s the problem. Gift exchange is brittle. It might collapse disastrously if heavy-handed management causes a withdrawal of goodwill, if excess regulation displaces a sense of professional discretion, or if peer pressure leads one or two bad employees to infect others.
 The question, then, is: how can we design a system that’s flexible in the face of such brittleness?
The obvious - and not wholly incorrect - answer is to use market forces. As Tim says, the collapse of Southern Cross (another example of institutional brittleness) has not had disastrous effects, simply because another provider has taken over. And the very diversity and plurality of a well-functioning market protects us from the collapse of particular institutions within it. No-one, other than its staff, suffered much when Woolworths went bust because we just bought our sweets from elsewhere*.
There are, though, two problems here.
One is that market forces require space capacity - so that users of a collapsed or inadequate school or hospital can quickly move elsewhere. But provision of such capacity is expensive. There is an inherent trade-off between flexibility and efficiency.
The other is that the very introduction of such markets threatens to displace that gift exchange - as I say, it’s brittle; people might work for nothing for the NHS, but not for a private firm**.
I don’t say this to offer simple answers. The point is instead that there are none - because, surely, another lesson of this year’s events is that human affairs are unpredictable, and so we cannot foresee the consequences of political change.
* The banking crisis actually vindicates my point here. The massive losses resulting from the collapse of the tech stock bubble in 2000-03 led to milder economic effects than the smaller losses incurred by banks in 2008-09. This is because the former were spread over more people, whilst the latter were concentrated in a few oligopolies. We were too reliant upon a few brittle organizations. 
** Surely, HuffPoUK cannot recruit decent bloggers who are prepared to work for nothing for long?

Comments

[CS Clark]

"people might work for nothing for the NHS, but not for a private firm"

To an extent and/or speak for yourself. There's a thing called professionalism, and while sometimes it's paid in recognition, much of the time it comes accompanied by a fatalistic realistion that your extra work will probably never be noticed, or at least to assigned to you.

If you want to generalise you could say that professionalism wanes as managerialism waxes, because not only do the managers not recognise the extra work, which is par for the course, but they reward those who actually bad at their jobs but good at being potential managers. (Surely there's a Principle akin to Peter's about people getting promoted so that they can no longer do actual harm through their incompetence.)

[CMcM]

"market forces require space capacity - so that users of a collapsed or inadequate school or hospital can quickly move elsewhere"

Exactly: and where, even in the supposedly market driven private sector, are there large scale, expensive (capital intensive) pools of surplus capacity in any industry? &, here's an even bigger test, where are there such capital intensive pools of surplus capacity situated in a neat pattern such that it is convenient for everyone in the country to reach them when abandoning the supposedly failing alternative? So why should this work for health or education?

[Metatone]

I think it's very important also to recognise that Tim's blithe assurances that everything is fine for residents of former Southern Cross homes is nothing more than a prediction at this point in time.

They haven't been turfed out, true. But we don't know yet that they will be well cared for. And many of them were not well cared for in the first place. So, so far, for a great number of them, the market has failed them, is likely to continue failing them and provides no recourse...

And that's one of the key lines practical people (rather than ideologues like Tim) draw between services that are well placed in markets vs democratic provision... is it actually possible to line up the profit motive with the needs of the recipients of the service.

[Richard Gadsden]

HuffPoUK (and indeed HuffPoUS) has a very smart model: take bloggers with limited reputations blogging (ably, but with little notice) on their own sites, and give them the opportunity of a wider audience through HuffPo.

Successful ones will get offered a paid position sooner or later, but there's always a supply of new blood.

It's equivalent to the media companies running on endless supplies of interns, or perhaps, blogspot / wordpress / typepad succeeding as free blog platforms.

[Keith]

How do you apply market forces to public goods?

By definition this is impossible.

AS Adam smith points out there are undertakings which for the good of the community ought to be provided but no private entrepreneur will provide them or provide in adequate quantity or quality; as no private profit can be earned or the profit does not represent the true social utility or no private man can raise the capital to finance it. Hence the need for Taxation and public spending. Neither should some goods be private such as the Military or courts.

Most schemes of marketisation in the area of public service are an attempt to do what reformers thought about in the USSR, creating a shadow market to mimic the real one. Such ideas never worked and cannot work as a real market has characteristics incompatible with the nature of public goods. And central planning.

Getting private firms to replace civil servants does not change the fact that true public goods are never allocated by any method except political decisions.

[A1]

Is there any data on unpaid overtime in the public bs the private sector. My own, purely anecdotal, experience is that huge amounts of unpaid overtime is done by salaried staff in the private sector.

My concern is that you haven't properly identified the source of gift exchange. My guess is that the benefits the NHS receives in the ways you describe have more to do with old fashioned values than an appreciation of the overtime worked by 'healthcare professionals"

[Falco]

"How do you apply market forces to public goods?

By definition this is impossible."

Well yes but also by definition "public goods" are a very narrow field, one that doesn't include healthcare for instance. My view is that government should restrict itself to providing public goods only. Beyond that it's up to the demos to decide what goods should be paid for through taxation but the government should not be the provider because it is so chronically inefficient.