Rethinking economics 1: the private sector is the only true sector

Blogger Brent (of "A Mormon in the Cheap Seats") wrote an excellent post for faithful Mormons about how social services for the poor in the US are more about levelling the playing field than about creating dependency. While I agree with his main points, one thing that has repeatedly struck me about recent American political discourse is that discussion of government social spending has been framed almost exclusively in terms of helping the poor (and whether they deserve it, etc.). Yes, keeping people from starving on the streets is an important component of functioning modern society -- but it's not the only role played by the public sector.

Let's take a step back and talk about some basic economics. In a modern society, most goods and services are provided either by the private sector (individuals, corporations, private organizations) or the public sector (government, at the local, state, or national level). Each of these two sectors has its advantages and disadvantages (as I discussed here). Any good American can tell you that there are plenty of goods and services that are produced a lot more efficiently by the private sector, motivated by private profits. However, it seems like most Americans are unwilling or unable to accept that there exist critical goods and services that can be provided better by the public sector.

I know this sounds crazy, but hear me out. I think the classic example from economics 101 is the lighthouse. In a costal city, no private individual or corporation profits enough from the lighthouse to pay the entire cost of building it, but the entire city profits from the trade that is made possible by affording ships safe access to the local harbor.

A modern society has a lot of lighthouses (metaphorically speaking). Scientific research is a big one. Technology a cornerstone of modern industry, and scientific research drives technological advances. However, the private sector is horrible at scientific research because the profitable kind is the kind that sets out to prove "my product works and is safe". I assume that I don't have to explain that if you set out to prove a pre-selected conclusion, at best you will get something that superficially resembles science, but without the accuracy.

Another lighthouse is education. A modern society benefits from having an educated populace. However, there are (at least) two big ideological obstacles to having successful public education in the United States. The first is that people seem to believe that public education is some sort of "entitlement" -- which, in Americanspeak, means "Some free-loader getting undeserved money, goods, or services on somebody else's dime." The second is a pervasive American belief that the government can never do anything right.

This belief is so pervasive that many Americans aren't even aware that it is an assumption that they are making. For example, if the government provides some service badly (say, for example, public transportation) many Americans will immediately conclude that the problem is that the government is inherently incompetent -- rather than looking beyond that idea for other causes for the particular problem, or looking for examples of other governments that have provided the same service well (for possible ideas to emulate).

It surprises me how many people take it as an unquestioned article of faith that "we need to cut the government smaller." Regardless of what the problem is, that's always the solution. Now, certainly, there exist countries that absolutely would benefit from cutting their government smaller. But in the United States, after many decades of acting on this belief, maybe more random hacking at it (solely for the purpose of making it smaller) isn't helpful. Why not change to insisting on competence? Insisting that what the government does, it should do it well.

I know that "government regulation" is a dirty word in American English. But I would like to make the radical suggestion that while it's possible for government regulations to be done badly (causing inefficiency), it's also possible for government regulations to be done well -- achieving desirable goals for your society.

I saw an interesting illustration of this idea in a recent article in Bloomberg Businessweek. (Why was I reading Bloomberg Businessweek? Somebody left a copy of it in the train, and it turned out to be surprisingly interesting...) Anyway, the thing that struck me in the article was that in the US, government regulations are/were preventing people who want solar energy from installing it, whereas government regulations in Germany were instrumental in building a huge (largely private) investment in a solar network that is cost-effective, despite Germany not being a particularly sunny country. And the US public utility companies looking out for their short-term profits were a large part of the problem, so privatizing (a popular solution to government inefficiency) would do the opposite of helping. It's time to expect government competence instead.

How did Americans come to believe that the private sector is the only true sector? Here's my guess:

The cold war had a huge impact on American thought. A lot of what it means to be American is tied up in being the opposite of the Soviet Union. When the Soviet Union crumbled from within, it was almost universally interpreted by Americans as proof that the American way is the right way and the Soviet way was the wrong way. And this leads many people to the conclusion that the public sector is always wrong and the profit-driven private sector is the only true sector of the economy. (A secondary/related factor: too many educated people mistaking Ayn Rand novels for Economics textbooks instead of taking an actual Economics course.)

The problem with that logic is that just because having the entire economy run by a centralized public sector doesn't work, that doesn't imply that having the private sector run the whole economy does work. The culprit may well be a lack of balance. Indeed, the US seems dead set on becoming the example to illustrate that leaning too far in the other direction doesn't work either.

See also part 2: Lessons from Switzerland!!