Private vs public (again)

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.

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14 thoughts on “Private vs public (again)

  1. 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.

  2. 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 ?

  3. 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.

  4. 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.

  5. If I may chip in 2p worth: the issue isn’t whether we need health and education for the good of the economy, (clearly we do), but whether a state monopoly is the best way to provide it.

    You accept that manufacturing (production) is not best suited to the public sector, and British Leyland was cited in support of that.

    Why then, do we buy our health from the British Leyland model?

    Worse, why are we forced to buy it from them, denying anyone else a market in which to compete?

    If we had a plurality of health providers but National Insurance was just that, insurance for all, then we might get some competition in health service provision and that might move the game on a little. Blair got close to this, but then decided he’d started a few too many wars and went for safety of the lecture circuit instead.

    The NHS is largely beyond rational debate in the UK which is a shame.

    The arguments are quickly polarised between “heartless” right and “caring” left, when we should be able to get above that and explore the purpose and best way of delivering a National Health Service. It’s almost certain that any monopoly, private or public, is not going to be the best model we could have.

    • Thanks for the comment. In principle I agree that we should be considering the best way to provide healthcare/education. Firstly I should say that the point of this post was mainly to make the case that public spending does not simply soak up wealth and that many of the services providing by the public sector play a crucial role in wealth creation. It is, however, true (as I think you are saying) that this doesn’t then mean that this is the best way to provide these services. There clearly should be (and is) some private sector involvement in providing public sector services. My concern about opening up healthcare/education to the private sector is whether or not it will actually be better. The USA certainly has extremely expensive healthcare that is not provided to the whole population. The other issue is that a big part of the argument for having more private sector involvement is that it will introduce competition. I can understand that when I’m buying a TV set or a car (for example) I can make a choice as to whether to buy an expensive one (with all sorts of functionality) or a cheaper, simpler one. It’s my choice and the market can provide all these different options. How does this work for education or healthcare? We have a fairly good idea of the best way to provide healthcare or education. My concern is that what will happen is that we will have cheap, basic healthcare/education for the poor and more expensive and world-class healthcare/education for the wealthy. Personally, I don’t think this would be a good thing (for the individual or our society) but others might disagree.

      • I do accept your point that the public sector doesn’t soak up wealth in the way that some on my side of the argument imply. Bits of it do, perhaps even quite a lot of it, but for me the acid test of this is whether, without a welfare state, these services would be provided by the private sector. There’s no doubt that schools, hospitals, fire engines ambulances and such like definitely would, since as you say, they’re needed for the so called “real” economy to function.

        Wise employers in the industrial revolution used to offer basic level of healthcare to their workers for the self-interested reason that it kept them productive.

        So I agree on your substantive point.

        Of course the difference lies in the potential access to those private services which [almost certainly] would not be universal. This is surely the nub of what the NHS should do – ensure access for all to a privately provided (i.e. competitive) health service.

        We’ll have to discuss as a nation what the NHS should and should not do, since medicine is making so much possible that 100% of GDP wouldn’t cover it, but realistically only the left could start that debate and I don’t see them lining up to do it.

        That way we get the best of the original vision for the NHS (free access for all at the point of need) whilst harnessing the best of the private sector (risk taking, innovation, flexibility, customer first). I’m not denying the right of councils to set up and own hospitals if they want to, just their right to crowd out any other provision and competition. Farming out silly little bits like cleaning to the private sector is not privatisation – that just encourages a race to the bottom and screws the little guy. The whole hospital should be private and cleaning and maintenance would just be part of running the business. For a business it is, and we should have hundreds of companies involved, not one.

        By the way, US healthcare may be more expensive, but have you tried it? For those that have access to it (which is actually the vast majority of Americans) it blows the NHS into the weeds with standards of care, innovation and most of all, lack of waiting. You’ll be able to Google a case of neglect in the US just as I could in the NHS, but at a macro level, few Americans who are in their system would ever swap for ours. Of course those outwith the system certainly would! You’re not comparing apples with apples when you simply cite the dear old NHS as being cheaper. It is, but it’s worse.

        To take your TV set analogy a little further, what type of TV do you think the NHS represents? In my opinion, it’s probably a middle market set at best, and very probably a rather basic one. Certainly not a flat-screen 50″ plasma! In other words, your fear around competition has been dealt with by removing it, and allowing a lowest common denominator to prevail. This also services the equality argument: there is an absolute furore if one area creates a better service than another. “Postcode lottery” scream the headlines and the embarrassment of one area doing well is considered a problem. Rather than levelling up, state monopolies level down. That’s not a spiteful criticism, it’s inevitable of any dominant or monopoly provider, private or public.

        The other issue you raise is whether there will be a two-tier system of health and education.

        Well, there already is!

        The wealthy either go abroad for their operations, or hit the local BUPA hospital and have them done in weeks rather than years, and in accommodation which is like an hotel rather than a borstal.

        Ditto in education. The best schools are private. Argue why by all means, but the private sector is where the rich go to buy their education, so the very best have an entrenched advantage which the left usually rebutt by demanding those excellent schools be closed down! Suppressing competition when it shows up the state to be a poor provider isn’t the answer.

        So the centralised big-state model does nothing for Joe Average. It leaves him with a mediocre health and a bog-standard education system, which in turn serves to keep him in his place.

        There are great conspiracy theories on many blogs that the Tories are part of a secret world order that’s actively working to suppress the masses. It isn’t so! They’re just not that good, as the last two years of government has amply demonstrated.

        What keeps people down is lack of ambition and most of all, lack of confidence. These traits are soaked in during schooling and never seem to leave. The truly brilliant Paul Weller gives the line “we were no match for their untamed wit” in the Eton Rifles, and there’s the nub of the problem.

        Instead of the left being angry at the market system, they should lift their heads and take a look at what the others are doing right, then take what works, rather than what they hope will work. China’s done this in the last few decades, (though of course they’ve accompanied that with a human rights records commensurate with any communist regime), but they realised that letting industry get on with it was the best way to get things moving, not sticking to yet another five year plan.

        Why not do the same in the UK with the public sector?

  6. I should say that I lived in the US for a number of years and have tried their healthcare system. In fact, I have one child born in the US and one in the UK. I’m not as convinced that it is substantially better but I do agree that spending 20% of GDP on providing healthcare to 60% of the population (as is the case in the US) will probably produce a better service (for those 60%) than spending 9% providing for the whole population (as is the case here). One issue is whether or not the extra expense is worth it. I agree that you can find problem cases with the NHS but in the US people die because they do not have coverage and it’s not seen as a failure. One could argue that we should compare the healthcare coverage of the entire population rather than simply comparing those that are covered (i.e., the US system essentially fails to cover a large fraction of their population while ours makes some serious mistakes sometimes but at least tries to provide coverage for everyone).

    I suspect that we simply disagree on some of the fundamentals. I think we agree that healthcare and education are a fundamental part of our economy. My view is that we should be aiming to provide a good level of healthcare and education for everyone and, in doing so, will ultimately benefit our economy and society. I do agree that we should be willing to debate how to do this and should be looking at how others do it well and trying to emulate that. My main concern is that what is happening now in England is not doing this (i.e., it is driven by ideology rather than a real sense of what will work best – in fairness many views of those on the left are probably ideological too) and that healthcare in England will be severely damaged by what is happening at the moment.

    • Much more on which we agree than disagree, which is not what I expected, given the title of your blog!

      The issue boils down to access to health and education. My stance is to let the market provide it, but to ensure that everyone has access ensure that there’s a system (National Insurance) which is effectively compulsory insurance with a social conscience.

      We should concentrate on raising the bar, year by year, through competition and innovation. Some providers will fail, (as do some NHS hospitals now), and this is an essential part of a market system. That’s one obscenity of the current banking fiasco that one sector can operate risk free and we all pay for their excesses, but’s that for another blog.

      An interesting discussion. Thank you for it. As I mentioned to one of your fellow bloggers (SKWalker1964), I don’t really know anyone left of centre, so it’s really interesting to discuss these things with you!

      • The title of my blog probably reflects my general position, but I’m not a huge fan of labels. I think things are much more complicated than simply all “right-wing” ideas being wrong and all “left-wing” ideas being right (or vice versa).

        In principle I agree that one could have an insurance type system with a social conscience. There certainly are countries (Australia, France I believe) that do have this kind of system. My main issue is that I don’t really quite see, in the case of healthcare, how this free-market, competition type idea will work (at least locally). I have one health centre near me and one hospital. There probably can’t be many more than this, so where does the choice come. Maybe it can work nationally, but it’s not clear how it can work locally. Also, doesn’t choice imply a range of different types of services. If the country imposes (the social conscience) what type of service everyone should expect, how does the private sector then compete. Of course, if what we expect is very basic, it could be that the competition comes by providing a better service to those who can pay more, but this then goes against the basic tenet of the NHS.

        Let’s, however, consider a few things about the current form of healthcare in the UK. As far as I’m aware, we spend 9% of GDP on healthcare. Many comparable countries (Germany, France, Switzerland, Australia…) spend 20-30% more, often more like 12% of GDP. If the NHS is not providing as good a service as it can, it could simply be that we aren’t spending enough. Maybe to provide the kind of service we would like, we need to spend a similar amount to that spent in other similar countries. One could even turn this around and say that it is impressive that we can provide what we do for 20-30% less than many other countries. One could argue that this suggests that the current style is actually quite effective. We just need to spend more in order to improve what the NHS can provide. One could then discuss where this extra money should come from, and in the current climate I can’t see us suddenly deciding to spend more public money on healthcare.

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