Why private is better that public

This post by Don Boudreaux on Cafe Hayek reminded me of the insight that made me realize that private markets are more effective than public (government or politically-driven) markets.  It’s a two-parter.

Part I:  You first have to realize that most plans fail.

Part II: Feedbacks in private market clean out the failures, reward successes and encourage learning from failure.  In the public markets, feedbacks are not as strong to clean out failures while other feedbacks reward failure and there is little incentive to learn from failure.

Do you have any compelling arguments against that?  I haven’t heard any.

The arguments I’ve heard are “some government programs succeed” (which does not counter the insight, since it only says that successes are less likely, not impossible) or “the private market won’t invest in some things, that’s why it’s the government needs to do it” (that should be telling) or “voting works better than the private market, that’s why we vote (yet we all pretty much have the shoes we want, but at least half of us generally don’t have the politicians that we want).”

More about Part I:

I write a lot about failure and trial and error.  I remember learning about trial and error in public schools at an early age.

Yet, we seem to forget this lesson as adults.  We may be reminded when we have kids and watch them trial-and-error their way through the simplest of tasks, like figuring out how to open cabinet doors, or throw a frisbee or decide what to do after fielding a ball in tee ball.  But we still forget that this lesson also applies to adult things.

As adults, we have learned a good deal about how to do things and we tend to get into our routines where we capitalize on the things that have worked for us in the past.  We’ve had good luck with whatever auto brand we’ve been buying so we see no reason to change.  Our route to work is reliable, so why explore another one?

But occasionally something happens to upset our routine.  Something like our tried and true car brand turns up a lemon, so we’re a little more likely to consider and purchase another.  We do so with some hesitation because it’s not known to us.  But, lucky us, most car brands have been well tested by others, so we benefit from the trials of others.  It’s not like we’re buying an experimental auto produced by a startup.

More about Part II:

One such feedback that works in a private market is profit and loss.  Activities that generate profit from voluntary interactions grow.  Profit is the signal that tells producers that consumers value this product, for whatever reason (sometimes those reasons are hard to determine). In fact, activities that generate profit also attract competitors that might try offering a similar, but slightly different version of the product or service and give us more to choose from and better options in case our old stand bys let us down.

Activities that generate a loss go away because the folks assuming the losses can’t afford to do so forever.  A loss is a signal to producers that, for whatever reason, consumers do not find enough value in the product or service to cover its cost.

And we learn from failures easier in the private market.  Many successes came from previous failed attempts with some adaptations.

These feedbacks exist with government programs, but they are much weaker.  Losses, for example, are socialized.  That means they are spread out over many people (taxpayers) in a non-transparent fashion and it’s not worth it for each of those people to learn enough about it to vote differently in the next election.

In the public market, there are additional feedbacks that reward failure.  For example, when a government program, like education, is failing we tend to vote for the politicians who have a grand plan to fix it, if only they had more money.  So, instead of experimenting on a small scale, letting failures go away and successes expand, we start experimenting and failing on a larger and larger scales.

Then it gets even harder to make changes because such large experiments breed large constituencies and bureaucracies who are  more interested in keeping the experiment going, even if it isn’t working, than the disbursed voters.

6 thoughts on “Why private is better that public

  1. Seth:

    Excellent post.

    Regarding feedback being distorted in the public sector, this quote might add some insight:

    “If markets fail, governments fail too. Government is the only enterprise on earth that when it fails, it merely does the same thing over again, except bigger”. -Don Luskin TrendMacro

  2. Surely there are some things in which private enterprises would not invest and governments would better-serve the public, right? What about infrastructure? What about cutting edge science research with far-fetched, long-term benefits? What else can we come up with? I’m not saying we should spend trillions on these every year, but I’d like to hear some more about what government should be paying for.

    Relatedly, Richard Branson is proving some very interesting points relating to public/private space travel.

    • Hi Ben – Thanks for the comment.

      I think the reasons folks might buy your first paragraph is that a) they have a difficult time imagining how things might be without the existing government solution and b) mistake their own clever assessment of a better-served public as the truth, when it might be far from it.

      I think its key to remember that no matter what functions we’re talking about, when you put them into government the political feedbacks are added in. If you keep that in mind and you will begin to recognize them and be able to trace their impacts on the system.

  3. Pingback: Privately-funded science university plan | Innovation Toronto

  4. Pingback: Challenge accepted | Our Dinner Table


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