08 September 2006

Fairy Dust

From my comment on Tim Lee's question about Blair:

Blair's "third way" is the traditional socialist belief that the economy, the country and the world can be managed and moulded to greater effectiveness, but with the old socialist economics modified by a magic sprinkling of private-sector fairy dust that would prevent repetition of the failures of the old state-run industries.

There is a perfect consistency between the belief that every public service and every industry can be improved by expert target-setting and regulation, and the belief that the Middle East can be made better by expert regime change.


The fairy dust is worth elaborating on. What I am talking about, of course, is PFI - the Private Finance Initiative, the idea that private-sector efficiency can be achieved in public functions by means of contracting with private suppliers to fulfil the functions.

The idea is not totally false. If there genuinely is an already-existing market for a particular service - say rubbish collection - then there is a good chance that the government can do better by entering that market than by organising and employing its own collectors. But it is usually the case that if there is a working market for something, the government should not be doing it at all in the first place, either directly or indirectly. PFI has most often been employed in areas which are in practice pretty much government monopolies. There is no competitive market in running prisons, and not much of one in building hospitals.

The reason I refer to PFI as "fairy dust" is because it is employed without any understanding of what makes the private sector different. The point is not the manner of organisation, but the pattern of incentives. The sales manager of a business unit which sells services to the government under PFI is as much a part of the public sector as any civil servant. His personal success depends on satisfying his government superiors/clients, accounting to them for the services he delivers and the resources he expends. If he satisfies them, he will win more contracts. He is in competition only with his peers - those who are selling the same class of services to government.

Von Mises produced an incredibly precise critique of PFI decades before its introduction to the UK, in his 1944 book Bureaucracy

It is a widespread illusion that the efficiency of government bureaus could be improved by management engineers and their methods of scientific management. However, such plans stem from a radical misconstruction of the objectives of civil government.

Like any kind of engineering, management engineering too is conditioned by the availability of a method of calculation. Such a method exists in profit-seeking business. Here the profit-and-loss statement is supreme. The problem of bureaucratic management is precisely the absence of such a method of calculation.

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