The Public Economy in Crisis - UCL

The Public Economy in Crisis - UCL

The Public Economy Public Goods and Public Value June Sekera Honorary Senior Research Associate Institute for Innovation and Public Purpose University College London December 12, 2017 The Premise and The Peril

The premise Public non-market production makes up a major share of all economic activity in modern nationstates. Certain needs can only be met, and some complex problems can only be solved, through collective effort and shared cost, if our common needs are to be met. This collective system is the public nonmarket economy, of which government is the agent. however

The peril Mainstream economics does not explain, does not even recognize that economic system. This blindness undermines the public economy system, de-values the public domain and jeopardizes the well-being of people and the planet.

Needed: New conceptual model Reform of economics teaching New foundation for public policy & practice in order to meet societal needs market solutions to meet public needs

railroads - privatized water supply privatized Air Traffic Control privatized National Parks branding rights for sale

Vouchers: funnel taxpayer $ to for-profit schools For-profit universities and colleges whose revenues are >90% taxpayer-funded Privatize infrastructure Funded by taxpayers, but revenues to private

owners/operators Commercialize Space Run government like a business contracting-out V IS

IB L E Growth of Government-by-Contractor a submerged para-state Federal Employees

S U B M E R G E D

Federal Employees Federal Employees Contractors Contractors 1950s

Contractors 1990s 2000s Contract workers outnumber government workers Clic

What hasnt been outsourced or privatized has been marketized Marketized Government Policing for Profit Social Impact Bonds

Municipal bonds Wall St. instead branding rights to our National Parks procurement: the free market farce

Performance Based Pay students customers Private-to-Public Transplant: the Results faux competition in a pseudomarket free-market farce of deformed procurement protocols perversion of purpose: revenue-raising becomes a goal

hollowing-out of public capacity counter-productive performance measurement Economics & The Economy [i.e., the market economy] What mainstream economics says about

government / the state Government interventions distort the market. collective action is a problem (Mancur Olson) public goods are a problem

(of market failure) price is the determinant of value (zero price problem) the role of the state is only to fix market failure problems The issue exists not just in economics,

but also in public administration scholarship. Public administration theory New Public Management (David Osborne) New Public Service (Robert and Janet Denhardt) New Public Governance(Stephen Osborne) Public Value (Mark Moore & Barry Bozeman)

all are reliant on market economics theory fuzziness and blurring degrees of publicness all organizations are public An organization is public to the extent that it exerts or is constrained by political authority. Barry Bozeman 1980s to nows Interweaving

Don Kettl; last several years meshing of public and private blended workforce (Paul C. Light) (Paul C. Light) Rebuttal Ronald Moe 1987

Promoters of privatization have been at the forefront of current efforts to mesh the public and private sectors Implicit in the rhetoric of the privatization movement is the view that the public and private sectors are alike, both subject to the same set of economic incentives and disincentives. Rebuttal (contd)

Ronald Moe 1987 Some public administration scholars see sector blurring as not only present and inevitable, but desirable, given the complexity of life in general. This fascination with complexity and ambiguity is misplaced Leads to nearly all public sector activities are potentially amenable to being transferred to

the private sector. What Happened? The birth and death of public economy 18th century Cameralism 1891 William Folwell, Univeristy of Minn. public economy should be recognized 1937 Musgrave: 2 spheres market economy and public economy 1950s Alan Peacock: a theory of the public economy is needed Mid-century radical shift

1969 Public Economics But from market perspective (Margolis and Guitton) Current: public economics, beholden to market theory. The idea of a public economy was extinguished by the mid-20th century. The triumph of rational-choice economics and market-centric public choice theory. Public Choice school

Market-model axioms and assumptions apply to the public sector. Indentured to the market paradigm Government as an arena for innumerable individual exchanges See Stretton and Orchard: Public Goods, Public Enterprise, Public Choice; 1994 Public Choice school James Buchanan: From...

Papers on Non-Market Decision-Making to - public choice economics the state is remade from the foundation of juridical sovereignty to one modeled on the firm Wendy Brown, Undoing the Demos 2015 The market model does not provide the tools

to analyze or understand the public non-market system. The Void An analogy A physics that deals with how things work on land but ignores the reality that

things work differently in water. How come boats dont have wheels and cars dont have rudders? It doesnt work. The Void We lack a -*cohesive

*internally consistent *coherent economic logic that explains public production. The difficulty lies not so much in developing new ideas as in escaping from old ones. John Maynard Keynes

multiple economies There is more than one way to produce things. MULTIPLE ECONOMIES Nonmarket Economic Systems Mission-driven; Need-driven Non-profit sector

Public economy Core economy Agent -- Governments Agent -- Households Market Economic System

Private-profit-driven Agent Firms Agent: voluntary actors The Public Economy Government as a Producer Paul Studenski 1939

Government is a producer. The result of government activity is products: Public Goods Public Goods / Public Economy Purpose Purpose satisfy societal needs:

Supply goods or services not supplied by other means; Solve multifaceted or technologically complex common-needs problems; Make particular goods or services accessible to all regardless of ability to pay. Public Goods Public Goods

Personal Safety, Security, Protection Educational Opportunity Health, Fitness and Recreation Physical Infrastructure Public Goods

Business and Commerce Services and Protections Legal System and Legal Protections Individual Rights and Freedoms Public Goods Communication and Navigation

Financial Security and Protections Financial Infrastructure Data and Information Public Goods Community Services

Innovation Cultural, Historic and Heritage Preservation Environmental protection Public Goods the connecting concept

paved streets safe bank accounts protections of treasured public places non-tolled highways rights to associate freely and to speak out foods safe to eat long-view investments in innovation clean air

drinkable water net neutrality and hundreds more Government produces:

products services benefits obligations These are products tangible and intangible created from resource inputs via a process which uses governmental machinery that must be built, managed and maintained.

The public economy a systems perspective The Public Economy Systemic drivers: Collective choice (aggregated individual choices; voting) Collective financing

(taxes, money creation, etc.) MARKET VS. PUBLIC ECONOMY DYNAMICS MARKET EXCHANGE PRODUCTS & SERVICES PRODUCE

R (fi rm ) CUSTOMER $ Demanddriven Success = P r o fi t PUBLIC ECONOMY

CONSTRUCTIVE FLOW PRODUCER (govern m en t ) $ PRODUCTS, SERVICES,

BENEFITS, O B L I G AT I O N S P OL IT Y $ A P P R O P R I AT I O N C O L L E C T I V E PAY M E N T

A U T H O R I Z AT I O N ( L E G I S L AT I O N ) E L E CT E D RE PRE S E N TAT IV E S COLLECTIVE CHOICE (VOTING)

Need - driven Success = Achieving purpose & Meeting need * Beneficiaries includes: recipients, users, clients, obligatees June A . Sekera THE PUBLIC ECONOMY - DYNAMICS PRODUCTS,

SERVICES, BENEFITS, etc. PRODUCTS, SERVICES, BENEFITS, etc. A U T H O R I Z AT I O N

COLLECTIVE CHOICE ( L E G I S L AT I O N ) (VOTING) A P P R O P R I AT I O N C O L L E C T I V E PAY M E N T

( L E G I S L AT I O N ) Need-driven Success = achieving purpose & meeting need June A . Sekera

Constructive Flow Far more complex than exchange Invisibility

Submerged state Required rationing Measuring results Long-term positive externalities Invisible outcomes Harms that do not happen Constructive Flow -advantages

Non-rival supply Single-system efficiencies Increasing returns to scale / network effects Uncertainty embraced, so more innovation support Public financing costs less Public provision often costs less

The Other Void Mainstream economics: another omission NATUR A L PUBLIC

economy CORE (household) economy MARKET W O R L

D economy WASTE ENERGY The Biophysical Basis of All Production Innovation

solving wicked problems; meeting common needs Markets cannot, or cannot alone, produce certain things: GPS Clean air for all Education for all Food safety nation-wide

For the future: Distributed renewable energy sources, affordable to all Why? Market Economy Short time horizon Growth as a requisite

Uncertainty-averse Profits are essential Public Economy Long time horizon Public purpose Uncertainty is embraced Collective financing

(not profit-driven) LONG-VIEW INVESTMENT Innovation Chain BASIC RESEARCH APPLIED RESEARCH

EARLY STAGE DOWNSTREAM The Devaluation of Public The decades-long campaign to devalue that which is public. The Road to Serfdom Hayek

The corrupted rhetoric of public The rhetoric of public -co-opted & infused with negativism public choice - anti democracy; anti-public public goods - portrayed as a problem De-valuation of public the results The public nonmarket system has been discredited, de-legitimized,

pauperized, privatized, hollowed-out -- dismembered. Mis-Valuation The GDP Problem #1: the measurement problem Under-valuing public production Public production value = cost of inputs Private production value = price of outputs

Mis-Valuation The GDP Problem #2 A category problem A significant portion of PCE is publicly financed public spending [so-called transfer payments like Medicare and Social Security] heavily subsidizes personal consumption and raises the level of GDP. In the GDP method, public benefits are not directly counted.. The key [point]is that the consumption is not private. It is

structured by legislation, protected by public agreement and heavily subsidized by government. Clearly, it is public consumption more than private consumption. Lew Daly, What is Our Public GDP? 2014 Public Value: the many ways to value public Evident Value Demonstrated Value

Utility and Scarcity (P. Studenski) Non-Wasteful Sufficiency (H. Daly) Aggregated individual value choices Evident Value Corporate interests perceive public goods as valuable. They value: railroads (privatize), public water systems (privatize) air traffic control (privatize)

highways (toll roads) space exploration (property rights on the moon) Demonstrated Value Demonstrated Value Multiplier effect of public spending Crowding-in effects of public investments Value to firms of public goods like mass

education, infrastructure. Reams of evidence have been produced Demonstrated Value the value of public economy efficiency PPPs Evaluation no systematic difference in public vs private efficiency; public financing costs less;

ergo better value to use the public sector. Efficiency: no evidence for private efficiency advantage IMF consistently sceptical on comparative efficiency claims While there is an extensive literature on this subject, the theory is ambiguous and the empirical evidence is mixed.(IMF, March 2004) Global meta-review of 80+ studies on outsourcing: it is not possible to conclude unambiguously that there is any systematic difference in terms of the economic

effects of contracting out technical areas and social services (AKF Denmark 2011) Some signs of efficiency gains in waste, but linked to wage cuts Analysis compared performance of all European companies privatised between 1980 and 2009 with that of companies which remained public: found, with a high level of statistical significance, that privatised companies did worse than those that remained public, and continued to do so for a period of 10 years: the privatization group underperforms the group of sectors remaining public. (Knyezevas and Stiglitz 2013) Dr David Hall; University of Greenwich, PSIRU

Efficiency: across sectors, no evidence of extra private efficiency Water and waste: Meta-review of 27 econometric studies on comparative public/private efficiency in waste and water various countries: We do not find a genuine empirical effect of cost savings resulting from private production (Bel and Warner 2010)

Water, electricity: no statistically significant difference in efficiency scores between public and private providers. (Pollitt 1995, Estache et al, 2005, Warner and Bel 2009) Buses: no significant difference in efficiency between public and private bus operators, or mixed systems: (Pina and Torres 2006)

Auditing: Australia: outsourced audits are more costly (Chong et al 2009) Prisons: privately managed prisons provide no clear benefit (Lundahl et al. 2009 ) Airports: Empirical evidence regarding the effects of privatization on the efficiency of airports is scarce and largely inconclusive (Bel and Fageda 2010)

Rail: global review of rail privatisations finds mixed results (Beck et al 2013) Telecoms: global study comparing private and public found: efficiency growth following privatizations is significantly smaller than growth in public sectors. (Knyazeva, Knyazeva and Stiglitz 2006)

UK privatisations in general: little evidence that privatisation has caused a significant improvement in performance (Martin and Parker 1997, Florio 2004) Value for money: PPPs vs public sector Cost of capital: always higher for private sector

Construction on time: costly turnkey contract No efficiency savings Real transaction costs and uncertainty No reduction in public spending under PFI schemes: government pays Factor Comparing

Evidence indicates 1 Cost of capital Debt interest + dividends PPP more expensive

2 Cost of construction Comparative costs and completion PPP more expensive/neutral 3

Cost of operation Comparative efficiency Neutral 4 Transaction costs

Procurement + monitoring, management PPP more expensive 5 Uncertainty

Incomplete contracts, contingent liabilities, impact on service PPP riskier Demonstrated Value If there is no systematic difference in efficiency, then it is always better value to use the public sector. (Hall, 2017) Simply put:

The public economy system costs less and works better (Sekera, Dec. 2017) Public Value Utility and Scarcity government is a productive, wealth-creating organization. It supplies direct utilities as well

as aids to private production. Production consists in the creation of utilities. Government furnishes services and goods which satisfy the two tests of economic value - namely, utility and scarcity. Paul Studenski Government as a Producer 1939 Public Value Biophysical-based Value

Unless we can distinguish better from worse states of the world then it makes no sense to try to achieve one state of the world rather than another. We need a policy of nonwasteful sufficiency. (Daly) Usable energy as the ultimate source of economic value (Odum) Value Creation in MARKET SYSTEM Products & Services

P C $ Value = Price Value Creation in PUBLIC ECONOMY SYSTEM

Products, Services, Benefits P ng ti o V Law

s $ EI $ Value = Meeting Needs B

Public Value: Aggregated individual value choices Public Value as aggregated individual value choices: collective choice. Public value is contested in the political arena: differing interests are resolved, and conflict and argument lead to decision and action. Collective conflict has to resolve into

collective choice. (Ranson & Stewart) In democracies: voting Public Choice economics Disabling Democracy (Stretton and Orchard) Public choice theory argues against decisionmaking by a democratic majority. (Stretton & Orchard p 151)

the franchise enlarged the welfare state (Tyler Cowen, summarized in MacLean pg 223) Arrow[had virtually] shown that democracy, interpreted as equivalent to majority voting, could not work. (James M. Buchanan) Public Economics but beholden to market theory

Courses many Textbooks e.g., Economics of the Public Sector; Joseph Stiglitz; 1988, 2000

A new public economics would: demonstrate the intrinsic value of a form of production besides the market; be a new foundation for public management. A new public economics could also

Incorporate the realities of biophysical constraints on production and shape the policy agenda. A new public economics: the path forward Theory: collaboration; conversation & working out a conceptual model of the public economy Applied theory: developing content

Curriculum a coherent set of courses Course syllabi Teaching economics, public administration, political science, law Recent and growing interest I dont care who writes a nations laws, or crafts its advanced treatises, if I can write

its economics textbooks. Samuelson The difficulty lies not so much in developing new ideas as in escaping from old ones. John Maynard Keynes

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