I got a little riled this morning by a comment at the bottom of Zoe Williams’s article about privatisation of public sector services. I thought the article
was excellent and asked some insightful questions. It seems that a significant fraction of the new private sector jobs are simply jobs created by the outsourcing of public sector jobs, in which case we’ve essentially saved nothing (or more correctly, these new private sectors jobs don’t indicate any real private sector growth).
The comment that annoyed me was this one which is essentially the fallacious argument that the private sector creates wealth and public sector soaks up wealth. It’s complete nonsense and I’ve blogged about this before. Essentially, as far as I’m concerned, the primary difference between the private and public sector is that the main goal of the private sector is to make a profit while the main goal of the public sector is to provide public sevices at a cost that fits within a preset budget. Many people assume that making a profit equates with wealth creation, but it does not. Wealth creation can lead to increased profits, but increased profits does not necessarily lead to wealth creation.
If we were to provide healthcare in a manner similar to that in the US, the total cost of healthcare would increase from about £100 billion to somewhere between £200 and £300 billion (this is assuming that we didn’t simply decide to not provide healthcare for the lower half of the income distribution and to simply let poor people die when they become ill). In this scenario there would be many companies making substantial profits. If this increased spending on healthcare resulted in the UK population becoming incredibly healthy and so able to work without taking days off and allowed everyone to be more productive, the increased spending could potentially generate wealth. Judging by the typical health of an American, this seems unlikely. This increased spending would, essentially, destroy wealth. Hundreds of billions of pounds that could have been spent on food, holidays, cars, or any kind of luxury would now be spent on healthcare.
Sure, there’ll be plenty of healthcare companies making substantial profits but essentially they will be providing a healthcare system similar to what we have today for 2 to 3 times the cost. Essentially my argument is that wealth creation requires efficiencies and it needs to be relative to previous costs. We need to work out how to provide services at the lowest cost that doesn’t damage quality. The public sector is a crucial part of this process as it provides education, healthcare and infrastructure that allows the private sector to then go and make their profits. Wealth creation is about more than simply making a profit and it’s time that people started to realise how important the public sector is in providing a foundation for wealth creation.
All thats as maybe but entreprenuers are Capitalists by nature and every nation needs them. They naturally belong in the private sector and they believe in the personal profit motive.
Joe Bloggs doesn’t even want to think about these things he just wants to do his job for a packet of pay and go home.
I agree that entrepreneurs are by nature capitalists and I have no issue with entrepreneurs doing creative and innovative things and being rewarded accordingly. My point in this post is that the simple argument that the private sector generates wealth and the public sector does not is simplistic and, in my view at least, wrong. The public sector provides infrastructure and services that are crucial to wealth creation. One could argue about whether this infrastructure and these services are being provided in the optimal way, but they are still a crucial part of wealth creation. Also, privatising a public sector service and allowing some investor to then make money is not, necessarily, wealth creating and could – in fact – be wealth destroying if the cost of this services increases with privatisation.
Hmm. Lets just break that down a little when we say ‘ public service ‘. SOME public services have no competition so there is no pressure to deliver in a monoply situation.
i worked in one of them myself for 30 years, when competition was eventually allowed in our inefficiencies and high labour costs were soon found out. Though of course it was nice whilst it lasted for me and my colleagues.
Soon after the industry was opened up to competitors jobs had to be shed or the company would simply have gone bust.
Somebody has to produce wealth before anybody can consume it. By hard experience we know that state owned mass manufacturing industries(eg the car industry-British Leyland in the UK ) did not work.
We can go into the reasons why but one of them without doubt was the union and the hard-left who seemed hell bent on ruining the industry-they did and DO have an agenda.
We still make cars here but they are owned by foriengers and this has been a big success-you cant run to the government for bail out money-you either compete, sink or swim. Right now they are swimming vigorously.
In a world of global markets other Countries have been producing things much cheaper and they have been grateful for the business, especially China. When THEY demand too much from employers the work will come back. Thats how markets work.
Doctors, nurses, the Police, the Fire Brigade etc are all good things in a civilised society, we need them for our health and safety but they dont actually create anything.
I think I agree with most of what you say. I don’t see any good reason why manufacturing should be in the public sector. My main issue is with your last sentence. Healthcare, education, police, fire brigades, etc. are a fundamental part of wealth creation. You say they may not create anything, but I would argue that they do. Countries with a healthy, educated population are more likely to create wealth than ones without healthcare and a decent education system. My argument is that wealth creation is about more than simply creating things. It’s about providing services and infrastructure that then allow for the creation of things that may be the final step in wealth creation. I agree we can’t have an economy without the creation of some kind of product, but the efficient creation of that product requires other things to exist (such as healthcare, education, etc.). We could argue about the best way to provide these services, but they are crucial nonetheless.
My point is those services are not primary they are the icing on the cake.
We had to work and trade domestically and internationally before we had a national health service or many others we take for granted in this day and age.
We do things a lot better now with those services because we are healthier and better maintained as a result-they do of course come at a price-the big debate then becomes political.
How much should we pay collectivelly and what proportion of Taxes according to our incomes ?
I think this is where I disagree. The point I’m trying to make is that services like education, healthcare, a police service, transport, all help us to have an effective economy. They play a crucial role in creating wealth. One could argue about whether these services should be provided through the public sector (as we do in the UK) or through the private sector (which probably doesn’t actually happen anywhere in the world), but having these services is crucial. It is true that if you were in a country with poor education, a poor health service, no police etc, it’s probably easier to create wealth than it is in the UK at the moment, but that’s only because you’re starting from a low baseline.
I worry that we’re arguing at cross purposes here. My argument is that these services are crucial. In the UK many of these services are provided through the public sector that is funded through taxation. We could change how these services are provided, but if we wanted to provide a similar, or higher, level of services the cost to the economy wouldn’t necessarily change, it would just come via a different route (private payments rather than direct taxation). To suggest that because it is funded through taxation it is a drain on wealth creation while if it was funded privately it would promote wealth creation, just seems completely misguided to me.
We all started from a ‘ low baseline ‘ and i haven’t said or suggested we should fund those services privately. But its always a question of how many services, how much we should pay for them and what value we get out of them (selfish individuals might say not much).
Personally speaking ive never used the Fire Brigade never been in hospital very rarely used the Police service and visit my GP seldom.
But of course lots of people are less fortunate than i am and they need all those services to varying degrees. Im happy to pay my share of Taxes for those things.
I disagree with you in princple. For example China has been the fastest growing economy for years, now the second biggest in the world.
They got there on endless cheap labour, initially they obviously didn’t have great public services they have improved as a result of their growing wealth from mass cheap exports to the West especially the USA.
They are still well behind us in things like healthcare but they only got to where they are now through production-making things.
Its a question of which came first which is actually a no-brainer. You cant afford good public services without producing wealth first,
Thats all i want to say about it really.
I don’t disagree with much of what you say above. I completely agree that you need some wealth in order to start providing services. I wasn’t trying to suggest that you needed public services before you could create wealth. The simple point I was trying to make in the post was that these services then act to promote wealth creation. Maybe you actually do disagree, but the reason that countries like China provide these services is not simply to be decent and help society, but because it then promotes further growth. It’s not just icing on the cake, it is a crucial part of the wealth creation process (in my view at least). My objection (as pointed out in the post) is to the view that the private sector creates wealth, while the public sector does not. The public sector may not create a profit, but it can play a role in wealth creation or – more correctly – the services provided, in the UK, by the public sector are a crucial part of the wealth creation process. The point I’m trying to make is actually quite simple and I’m a little confused about what you disagree with. Also, this isn’t a post suggesting that the services are provided in the most efficient and ideal way, simply a post suggesting that these services are important and they shouldn’t be regarded as valueless simply because they are provided through the public rather than the private sector.