Better Public Services

In many areas of life we accept that experimentation, competition and replication of success will gradually lead to better results, or improved suitability to the environment. This is the basics of evolution and market efficiency.

When it comes to public services this notion meets the moral intuition that justice and fairness requires an equality of treatment, hence a universal standard of provision.

However, imposing universality prevents experimentation and can stymie adaptation to local demands, becoming a conservative break on improvement.

Some style this type of opposition as fairness vs. efficiency, but what I am concerned with is fairness vs. improvement.

While the equality of destitution is the easiest form of equality to engineer, it not the equality that most meaningfully aspire to.

How do you get experimentation, competition and replication of successful results in public services?

Having a diversity of providers that can grow and fail, as in the private sector has many attractions.

When compared with delivery by centralised bureaucracy, discrete service providers have the advantage that they have simpler chains of command with less competing priorities. They can also focus on developing their specific specialism and expertise within the organisation.

Among the problems of outsourcing to the private sector is that using public resources to pay providers who have a duty to retain part of those resources as private profit is the very definition of systemically inefficient. Money will be skimmed or the directors are not doing their legal duty.

There are also the arguments that a private sector motivations are inappropriate in many areas of public service. Prioritising greed as a motivatorⁱ does not fit well those who have a caring vocation and that introducing a financial incentive changes the values through which people judge an interactionⁱⁱ.

As such it makes sense to outsource to providers who do not operate for private profit i.e charities and social enterprises. In this way we retain the feature of a number of specialised, interchangeable service providers but any profits are reinvested in the organisation and service provision. Charities may also draw in additional resources to subsidise service provision, the exact opposite of what will happen if a private company is contracted.

How do we get successful service provision by community-benefit organisations?

For a market mechanism to work the customer must be able to determine which provider best satisfies their demands, and allocate resources accordingly. Without this, “bottom up” or customer allocation of resources will not produce the virtuous dynamism desired.

Similarly it is not safe to outsource any function that an organisation does not have proper understanding of in-house. Without in house knowledge you cannot know what you are buying and whether or not it is best available option.

In health care and in education it is hard for the end user to be the best judge of their own self interest. Expertise is required in the former, the latter is largely consumed by children. In these cases, and others, there is an argument for retaining the state as the customer, allocating contracts, while the citizen remains the consumer.

But the state, or more specifically the functionaries of the state, have no innate expertise. One of the state’s key roles will be to develop, retain and enhance the expertise required for it to be a effective purchaser on behalf of citizens. This is essentially means having a firm grasp on the best ways to deliver a particular service.

This requirement, combined with the dictum on outsourcing, suggests that the state should directly manage and run some service provision organisations and ideally these should be exemplar institutions that research and accumulate best practice, and indeed best personnel, from the wider service delivery system. In practice this would mean the running of flagship hospitals, schools, care homes, etc… that have a strong data gathering and research capacity.

The expertise accumulated should be used to make effective purchasing decisions, but just as important is the sharing of the expertise with the wider sector. As such state exemplar institutions should also have teaching capacity.

In this vision the state becomes a “facilitative state”, one of the concerns of which is the formation and enabling of civil society organisations. The state would create and enforce a regulatory environment combined with skills and knowledge transfer.

Designing the marketplace

Exactly what the state pays for will have a profound effect on the eventual outcomes. A classic example is the London bus contracts. Where providers are paid for how close they are to the stated timetable within six second slots and do not retain payment from or have any interest in the number of people that they carry.

Similarly, in a variety of sectors contracts could be designed not as fee per service but on outcomes, e.g. Not for performing an open heart surgery, but on the years lived (or Quality Adjusted Life Years) by a patient who presents with a heart problem. Outcomes based contracts should be possible with improved data handling.

Capitalising providers

One chief advantage held by the private sector is greater capital and more ways to access it. In many cases community-benefit organisations are not adequately capitalised to provide large scale contracts.

The creation of a state backed national bank could address this. A state bank would act as a retail bank in the market, as in China or Singapore, it could issue every citizen with a basic bank account and facilitate benefit payments, trust funds and pensions. It could also play a role in capitalising community-benefit service providers through loans. It might also be wisely limited to this type of lending.

A semi-independent bank using its deposit base to make loans for investment in public service provision would likely lead to a lower capital requirement for the state and a reduction in public borrowing. As at least part of the liability for investment in public services would be transferred to the relevant service organisations becoming, in accounting terms, an asset, rather than a liability.

The bankruptcy regime would be critical in shaping the character of this system, but at its most basic, if the state was the primary lender it would have first call on the assets in the event of a bankruptcy.

This would ensure that public service infrastructure would return to the state’s organs when a provider failed.

Er …that’s it

So in essence this a modular vision of public service provision. One which utilises market dynamics without embedding private interest. And one in which the state’s primary role becomes monitoring,facilitating and improving independent service providers. And which solves the problem of capitalisation through a dedicated bank.

iCapitalism as system that allows individual property rights harnesses greed effectively. There are powerful human motivations that are not harnessed or rewarded as effectively. This is in part because the greed is a simple motivation to design rewards for. Nurture, heroism, curiosity are not built into our institutions in the way that greed is. This is one of the most profound challenges in any thought about social engineering.

iiSandel, Areily, Neruoscience

The internet vs. Hayek

or the Road to Surfdom

Many of the key arguments for not intervening in markets comes from Hayek. One that is particularly central is sanctity of “price”.

Hayek saw economies as complex dynamic systems that were far beyond the power of a human mind to comprehend. He believed that markets act to process a vast array of complex information about preferences, resources and capacities. And that they output this information in the condensed form of “price”. Through these price signals we are able to make coherent (rational) decisions across a range of economic activities.

Interfere with these price signals and you distort the allocation of resources in ways that will necessarily lead to inefficiencies.

So, moral arguments about your life being decided by bureaucrats aside, the government does not have the capacity to process the range of inputs that go into making a “price”, and therefore does not have the capacity to make sound interventions in the economy.

This key plank of the Hayek’s argument is clearly threatened by super-computers, big data and mobile telephony. The quest for user-data is in it’s infancy, but it looks like a healthy little monster.

It is becoming increasingly possible to gather real time information on a transaction by transaction basis in the real economy. The Internet of Things will only extend this.

The question then becomes; is it possible to gather and process information better through computing than through price?

Turning to the moral argument, Hayek assumes that the only alternative to allowing markets to facilitate resource allocation is for a centralised bureaucratic state to do so instead.

Any processing system that sought to emulate the information gathering capacity of “price” would have to be ubiquitously distributed. It would be sent data from everywhere. And this provides the possibility of an alternative to such centralised bureaucracy.

The question would be what data do these end agents send? And further, what authority they have over the pattern of resource allocationⁱ?

So as to the question of how we arrange resource use and distributions on space ship earth, we could seek to address externalities in priceⁱⁱ by changing the laws that structure  marketsⁱⁱⁱ .

It is law that forms the parameters of the complex system^iv. altering the parameters should produce different emergent behaviours, that is different patterns of resource use.

The more distant and radical possibility is to create an information processing system that gathers data more richly than “price” does.

And this is the essence of the institutional design challenge facing so many established institutions. From bureaucracy to journalism.

How do you create a system that best accumulates, agglomerates, the useful contributions from a distributed contributor base^v?

ICT allows novel forms of co-operation. Effective co-operation wins in complex systems. Ask the game theorists.

And as to novel forms of co-operation over ICT, ask the open-source world. Unsurprisingly, software writing already has an institutional design for the age of distributed inputs.

A journalistic platform that could emulate this would end the standard model of print journalism.

A bureaucracy that could do this would be able to deal more effectively with complexity and monitoring costs.

A democracy that could do this might be worth the name.

And an economy that could do this might be both efficient and fair.

i You could simplify authority of agents within the market system as one dollar, one vote.

ii The information the market does not process, such as the value of the planet remaining habitable.

iii Restricting certain activities and transactions, or providing subsidies or other incentives is common, but a more thorough approach would be to re-examine property rights themselves, in particular, the all encompassing nature of individual property rights. This work is underway in earnest in the sphere of intellectual property.

iv While Hayek favours non-intervention, the basic parameters of a market, such as whether apples should be apples, whether I am allowed to sell the organs of my infant labour, and whether bullets are legal tender, are determined by law. Laws allow markets to provide predictability, or at least, reasonable expectation, and this is what makes them so useful for economic activity. Constraints, not freedoms, make markets.

vWe might even evolve a system through competitive selection rather than design.