> Rather than lean and efficient services, privatization appears to have led to administrative bloat, price inflation, and a gutting of state capacity.
Privatization of government services is not the same thing as a free market, and hence free market forces are not applying to it.
In a free market, when a business contracts for services from another business, it is motivated by value received and price paid. When the government contracts for services, price and value are of much lesser concern. The bureaucrats negotiating the contracts have little care for what it costs, whereas political and social concerns are paramount.
It's not in the least surprising that privatizing who provides government services does not result in cost savings.
In principle competitive bidding should result in cost savings because anyone who could do it for significantly less could profit by submitting a lower bid.
The problem is some combination of corruption and regulatory requirements. If the bureaucrats write the contract in such a way that only one company can satisfy it, that company has no effective competition so they don't have to compete on price. Same thing if the contract requirements, or the paperwork required to enter into the bidding itself, are such that smaller entities need not apply and you again have insufficient competition to drive down prices.
But none of that goes away by bringing the project in house either, you just trade corruption and high costs by contractors for corruption and high costs by public sector unions, and in that case there is explicitly not even the possibility for competition.
So you still either have to solve the corruption and bureaucracy somehow (effective method unknown), or move the project entirely to the private sector, e.g. by using the money instead to make tax cuts for regular people or transfer payments so that instead of government housing projects you leave people with the money to buy market rate housing directly, or whatever else they need.
> Privatization of government services is not the same thing as a free market, and hence free market forces are not applying to it.
The problem is that nothing is the “same thing as a free market”. Free market don't exist in the real world, and the market forces are way less powerful than what we would like. They are almost always dwarfed by other forces (transaction cost, network effect, economies of scale, and information asymmetry for instance).
Remember, the free market model comes from an era when chemistry was modeled with the 4 elements !
A fundamental assumption of mainstream economics is that market prices are approximately correct. This is more for pragmatic reasons than anything; you need some sort of prices to compare unlike things and it's often easy to get some consensus on what the market price is.
If you want to calculate GDP some other way then you will need to decide what millions of prices "should" be and persuade others with your argument. Coming up with an alternative scheme is probably the easy part. Agreeing on a new standard would be much harder.
Consider also that those millions of prices are also changing, often rapidly.
The problem is that, even within mainstream economics, we know market prices aren't correct. Pricing externalities is something pretty much all economists can get behind, and that's just the beginning. Does anyone really believe health care prices are correct? How about all the other subsidies? Asset prices for things like startups are even worse.
In areas where there are no market prices or the market is obviously artificial, price and value become nebulous. Without any objective standards of value, what things are worth becomes a matter of opinion and politics. I am pessimistic on there being consensus on a better way of understanding value any time soon.
More likely we will muddle through with patches to the system we have. Philosophically, even major changes like a carbon tax or universal basic income are basically just patches to get prices somewhere closer to what we think they should be.
> If you want to calculate GDP some other way then you will need to decide what millions of prices "should" be and persuade others with your argument.
It's a bit worse than that because cost, value and price are all different things.
The amortized cost of making water available from the tap is pennies per gallon. The value of water is nigh infinite because without it you die. The price is presumably somewhere between those two values, but it could be anywhere -- an efficient water company might charge close to the cost but a robber baron with a hard monopoly on water might charge close to the value. The market only tells you the price, not the cost or the value.
In a lot of cases it doesn't even tell you that. Consider what happens when a person spends time on a hobby. The cost is not zero, the value is not zero, and there is no price. Even more complicated, suppose the hobby is writing free software. Then there is no price (or it's zero, which isn't very informative) but you have value being derived by people all over the world, who may each value it in a different amount.
> Philosophically, even major changes like a carbon tax or universal basic income are basically just patches to get prices somewhere closer to what we think they should be.
A carbon tax is definitely about pricing an externality. A UBI is kind of the opposite. It's basically admitting that we don't know how to value everything correctly so instead of that here's the money, go choose what you need for yourself.
If my understanding of the math is correct, a carbon tax is somewhat more fundamentally meaningful than UBI vs other forms of welfare. A carbon tax is in a way trying to model a previously external factor in the market, i.e. the environment or earth itself.
>Does anyone really believe health care prices are correct?
Yes. Market clearing prices are set by the intersection of desire/need and scarcity.
Health care prices can be virtually as high as you like if you can make health care scarce enough, because pretty much everybody wants to live.
The greatest profits are usually found where scarcity meets desperation.
This is also why most large corporations spend half of their time trying to tweak the desire side (advertising) and the scarcity side (market manipulation/intellectual property/contractual exclusivity/lobbying) in a bid to secure margins. De beers is probably the clearest example of success in these endeavours.
I would say the assumption of correctness is a "if you are so smart why aren't you rich" sort of heuristic.
Essentially if you knew that and that it was wrong then it would lead to massive arbitrage opportunities.
Personally I believe that treating value in terms of "should" is asking the wrong question. The actual questions are chains.
* What is the current production cost?
Can we do better?
* What does it cost to produce production if we can?
How long does it take to get it producing?
* Can anything substitute for it acceptably?
Currently reading this book (two thirds through it) - can confirm that it is very interesting, and raises many good questions on what producing value actually means.
Really valuation as a pursuit was abandoned for a damned good reason - it took a lot of time to get it through most of humanity's thick heads that value is circumstance based. Even something outragously useful like a fountain of youth would become relatively worthless if it was nearly ubiquitous like oxygen.
Likewise the public sector section is annoyingly simplistic in that it doesn't grasp the difference between neccessary and sufficent in creation. Research certainly does give major dividend when it is pulled off but it also requires utilization.
I am not sure if the actual book addresses it better but any refusal to acknowledge the complexity and tries for a simple one size fits all is frankly insane.
All theories of value integrate the idea of circumstance into their workings; Ricardo himself realized this. The spirit of the marginalist objection to an "objective" theory of value (I put objective in quotes because it's a mistake to view it as anything but as Marx put it a "phantom-like objectivity") was put by Whatley in 1832: "It is not that pearls fetch a high price because men have dived for them; but on the contrary, men dive for them because they fetch a high price" but as Cockshott and Cottrel put in Classical Econophysics, "if pearls washed up on the beach, they would not collect anything like their current price".
Ricardo's reply was that the precondition to a commodity having value is that it is firstly an object of demand. Smith's, Ricardo's and Marx's theories of value (the commonalities of which tend to be overstated, even by the likes of greats such as Samuelson) all describe the case in which if I decide to make a product and nobody (or not enough people) want it, this leads to my realization that what I've been doing is useless and subsequently moving my capital elsewhere.
I think Carchedi and Kliman defend Marx's version of the "labour theory of value" quite well, as do Shaikh and Tonak on empirical grounds, and from an opposing perspective Dumenil and Levy do as well. Others, such as Moseley and Patrick Murray, relax their conditions a litle and argue that it is a mistake to apply the theory to individual commodities, rather, it can only be applied to "aliquots representative of the lot".
I have a comment here with some (slightly outdated) information as to the status of the classical (mostly Ricardian and Marxian) theories of value among the people who still study it (usually heterodox economists): https://news.ycombinator.com/item?id=18490388
You make the author's point for her. When any model for valuation disregards the vast good arising from a fountain of youth, that (margin-based) model is corrupt.
(Obviously I'm disregarding all the derivative concerns that inevitably would arise from introducing immortality. After all, it's simply one possible example of a vastly undervalued innovation.)
Stiglitz weighs in on this very topic in today's Guardian:
”It's time to retire metrics like GDP. They don't measure everything that matters time to retire metrics like GDP. They don't measure everything that matters”
I did my undergrad in economics a decade and a half ago, and it could have just as easily been an applied statistics degree with a few classes on the history of politics.
I had to independently go read Hayek, Marx, Rothbard etc...and at the time there really wasnt any research that attempted quantifying value or mapping preferences to anything measurable.
So I'm glad to see this line of study come back into the discipline.
If I sell you something does that count as part of GDP? If I sell my labor to a company does my selling of it become part of the GDP? Then the company sells the product I produced for it, is that added to the GDP as well?
Or is it only when a company sells something that it is counted as part of the GDP?
The quick answer to your broader question is that there are multiple ways of slicing how GDP is computed, and yes, economists are aware of them and have thought through the edge-cases as well as being aware of where the measures fall short.
This aspect of economics is critically important as the supposed engine for growth changes from private to public domains. Where I live, the public sector far outweighs the private sector in providing jobs. As such, the voters follow the ever curricular pattern of growing the government to the demise of the private sector.
The subject of this book being the public sector, my interest would be the balance of the private and public. Just how large can the public sector grow ( with their overpaying for outsourcing, as the review stated) before becoming unsustainable?
Another good aspect of this book is it's analysis of healthcare systems. In the US, healthcare is often used as the poster boy for failed capitalism. The fact is that healthcare is overregulated and not at all capitalist in most Western societies. But that would be another book entirely....
The US health system had managed to merge bad attributes from different systems into a system that’s incredibly bad. Highly regulated, tons of unaccountable bureaucracy, lots of barriers for market entry , protectionist, lack of consumer choices and also highly capitalistic. The problem is that the US can’t decide what it wants so we have a system where a lot of people make a lot of money whole being protected from competition or even scrutiny by customers.
1. Modern economics doesn't try to define "value" objectively. Value is whatever price the market is willing to bear. This logic fuels speculation bubbles.
2. The finance industry is a huge part of a modern market economy. But what value does it provide?
3. Public spending is behind most fundamental scientific research: "research has shown that two-thirds of the most innovative drugs (new molecular entities with priority rating) trace their research back to funding by the US National Institutes of Health."
4. Public spending grows the economy. The effect multiplier is 1.5.
Capitalism optimizes for - something. And what it optimizes for matters. Think of the "free market" as a system for evaluating an objective function. You get what you optimize for. That may not be what you want.
"Externalities" are not in the objective function, which is the cause of many problems.
Does "it" earn the most? What is the definition of wall street? In my circles, those in tech have far out-earned those on Wall St, especially on a dollars per hour and quality of life metrics.
Are you advertising the book? I realized I'd read this comment in a separate thread today and, lo and behold, your profile shows you copy/pasting this exact comment across six separate threads, all at about the same time.
Edit: Not only that, but you've essentially plagiarized a Vox article[1] from earlier this year. You just copy/pasted the third and fourth paragraphs from the piece without even using quotations or attributing it to someone else.
Mazzucato is one of the most suspect economists out there. Courts a huge public profile, is apparently an expert on innovation without ever having worked in the private sector, and all the conclusions appeared tailored to win more consulting work with left-wing parties.
Her conclusions also tend to be far too simplistic. The reason why the UK has moved to using the private sector more is because the other way was bankrupting us. She seems to believe that the public sector can innovate...okay, where is the evidence of this? The examples of successful innovation are cases where private incentives have been merged with public funding. All very suspect.
>She seems to believe that the public sector can innovate...okay, where is the evidence of this?
Well, she wrote a whole book about it, she's not just asserting it. The public sector played a huge part in the genesis of the Internet for one thing.
>The examples of successful innovation are cases where private incentives have been merged with public funding. All very suspect.
But another pretty critical point of that book was that our public conversation is inhibited by the extremely limited vocabulary we use to describe it. Is a defence contractor really part of the "private sector"? Is a NASA engineering team part of the "public sector" the way an employee of a mail sorting centre is? What about an academic working for an old school monopolist like Bell? Ok, fine it was privately owned so if you want to use a crude and almost useless private/public sector split it is very easy to say "private" but it's not private sector in quite the same way as a local shop is, is it?
[+] [-] WalterBright|6 years ago|reply
Privatization of government services is not the same thing as a free market, and hence free market forces are not applying to it.
In a free market, when a business contracts for services from another business, it is motivated by value received and price paid. When the government contracts for services, price and value are of much lesser concern. The bureaucrats negotiating the contracts have little care for what it costs, whereas political and social concerns are paramount.
It's not in the least surprising that privatizing who provides government services does not result in cost savings.
[+] [-] AnthonyMouse|6 years ago|reply
The problem is some combination of corruption and regulatory requirements. If the bureaucrats write the contract in such a way that only one company can satisfy it, that company has no effective competition so they don't have to compete on price. Same thing if the contract requirements, or the paperwork required to enter into the bidding itself, are such that smaller entities need not apply and you again have insufficient competition to drive down prices.
But none of that goes away by bringing the project in house either, you just trade corruption and high costs by contractors for corruption and high costs by public sector unions, and in that case there is explicitly not even the possibility for competition.
So you still either have to solve the corruption and bureaucracy somehow (effective method unknown), or move the project entirely to the private sector, e.g. by using the money instead to make tax cuts for regular people or transfer payments so that instead of government housing projects you leave people with the money to buy market rate housing directly, or whatever else they need.
[+] [-] littlestymaar|6 years ago|reply
The problem is that nothing is the “same thing as a free market”. Free market don't exist in the real world, and the market forces are way less powerful than what we would like. They are almost always dwarfed by other forces (transaction cost, network effect, economies of scale, and information asymmetry for instance).
Remember, the free market model comes from an era when chemistry was modeled with the 4 elements !
[+] [-] skybrian|6 years ago|reply
If you want to calculate GDP some other way then you will need to decide what millions of prices "should" be and persuade others with your argument. Coming up with an alternative scheme is probably the easy part. Agreeing on a new standard would be much harder.
Consider also that those millions of prices are also changing, often rapidly.
The problem is that, even within mainstream economics, we know market prices aren't correct. Pricing externalities is something pretty much all economists can get behind, and that's just the beginning. Does anyone really believe health care prices are correct? How about all the other subsidies? Asset prices for things like startups are even worse.
In areas where there are no market prices or the market is obviously artificial, price and value become nebulous. Without any objective standards of value, what things are worth becomes a matter of opinion and politics. I am pessimistic on there being consensus on a better way of understanding value any time soon.
More likely we will muddle through with patches to the system we have. Philosophically, even major changes like a carbon tax or universal basic income are basically just patches to get prices somewhere closer to what we think they should be.
[+] [-] AnthonyMouse|6 years ago|reply
It's a bit worse than that because cost, value and price are all different things.
The amortized cost of making water available from the tap is pennies per gallon. The value of water is nigh infinite because without it you die. The price is presumably somewhere between those two values, but it could be anywhere -- an efficient water company might charge close to the cost but a robber baron with a hard monopoly on water might charge close to the value. The market only tells you the price, not the cost or the value.
In a lot of cases it doesn't even tell you that. Consider what happens when a person spends time on a hobby. The cost is not zero, the value is not zero, and there is no price. Even more complicated, suppose the hobby is writing free software. Then there is no price (or it's zero, which isn't very informative) but you have value being derived by people all over the world, who may each value it in a different amount.
> Philosophically, even major changes like a carbon tax or universal basic income are basically just patches to get prices somewhere closer to what we think they should be.
A carbon tax is definitely about pricing an externality. A UBI is kind of the opposite. It's basically admitting that we don't know how to value everything correctly so instead of that here's the money, go choose what you need for yourself.
[+] [-] nixpulvis|6 years ago|reply
[+] [-] crdoconnor|6 years ago|reply
Yes. Market clearing prices are set by the intersection of desire/need and scarcity.
Health care prices can be virtually as high as you like if you can make health care scarce enough, because pretty much everybody wants to live.
The greatest profits are usually found where scarcity meets desperation.
This is also why most large corporations spend half of their time trying to tweak the desire side (advertising) and the scarcity side (market manipulation/intellectual property/contractual exclusivity/lobbying) in a bid to secure margins. De beers is probably the clearest example of success in these endeavours.
[+] [-] Nasrudith|6 years ago|reply
Essentially if you knew that and that it was wrong then it would lead to massive arbitrage opportunities.
Personally I believe that treating value in terms of "should" is asking the wrong question. The actual questions are chains.
* What is the current production cost? Can we do better? * What does it cost to produce production if we can? How long does it take to get it producing? * Can anything substitute for it acceptably?
[+] [-] cs702|6 years ago|reply
https://www.amazon.com/Value-Everything-Making-Taking-Econom...
[+] [-] henrik_w|6 years ago|reply
[+] [-] Nasrudith|6 years ago|reply
Likewise the public sector section is annoyingly simplistic in that it doesn't grasp the difference between neccessary and sufficent in creation. Research certainly does give major dividend when it is pulled off but it also requires utilization.
I am not sure if the actual book addresses it better but any refusal to acknowledge the complexity and tries for a simple one size fits all is frankly insane.
[+] [-] claudiawerner|6 years ago|reply
Ricardo's reply was that the precondition to a commodity having value is that it is firstly an object of demand. Smith's, Ricardo's and Marx's theories of value (the commonalities of which tend to be overstated, even by the likes of greats such as Samuelson) all describe the case in which if I decide to make a product and nobody (or not enough people) want it, this leads to my realization that what I've been doing is useless and subsequently moving my capital elsewhere.
I think Carchedi and Kliman defend Marx's version of the "labour theory of value" quite well, as do Shaikh and Tonak on empirical grounds, and from an opposing perspective Dumenil and Levy do as well. Others, such as Moseley and Patrick Murray, relax their conditions a litle and argue that it is a mistake to apply the theory to individual commodities, rather, it can only be applied to "aliquots representative of the lot".
I have a comment here with some (slightly outdated) information as to the status of the classical (mostly Ricardian and Marxian) theories of value among the people who still study it (usually heterodox economists): https://news.ycombinator.com/item?id=18490388
[+] [-] randcraw|6 years ago|reply
(Obviously I'm disregarding all the derivative concerns that inevitably would arise from introducing immortality. After all, it's simply one possible example of a vastly undervalued innovation.)
[+] [-] randcraw|6 years ago|reply
”It's time to retire metrics like GDP. They don't measure everything that matters time to retire metrics like GDP. They don't measure everything that matters”
https://news.ycombinator.com/item?id=21623150
[+] [-] AndrewKemendo|6 years ago|reply
I had to independently go read Hayek, Marx, Rothbard etc...and at the time there really wasnt any research that attempted quantifying value or mapping preferences to anything measurable.
So I'm glad to see this line of study come back into the discipline.
[+] [-] galaxyLogic|6 years ago|reply
If I sell you something does that count as part of GDP? If I sell my labor to a company does my selling of it become part of the GDP? Then the company sells the product I produced for it, is that added to the GDP as well?
Or is it only when a company sells something that it is counted as part of the GDP?
[+] [-] octbash|6 years ago|reply
E.g. in your example, see the Value-added approach: https://quickonomics.com/gross-domestic-product-gdp/
[+] [-] Cyder|6 years ago|reply
[+] [-] Ididntdothis|6 years ago|reply
[+] [-] bjourne|6 years ago|reply
1. Modern economics doesn't try to define "value" objectively. Value is whatever price the market is willing to bear. This logic fuels speculation bubbles.
2. The finance industry is a huge part of a modern market economy. But what value does it provide?
3. Public spending is behind most fundamental scientific research: "research has shown that two-thirds of the most innovative drugs (new molecular entities with priority rating) trace their research back to funding by the US National Institutes of Health."
4. Public spending grows the economy. The effect multiplier is 1.5.
[+] [-] Animats|6 years ago|reply
That's the big question. What gets measured?
Capitalism optimizes for - something. And what it optimizes for matters. Think of the "free market" as a system for evaluating an objective function. You get what you optimize for. That may not be what you want.
"Externalities" are not in the objective function, which is the cause of many problems.
[+] [-] HashThis|6 years ago|reply
[+] [-] lotsofpulp|6 years ago|reply
[+] [-] Wh1skey|6 years ago|reply
[deleted]
[+] [-] dang|6 years ago|reply
If you don't want to be banned, you're welcome to email [email protected] and give us reason to believe that you won't abuse the site in the future.
[+] [-] jjulius|6 years ago|reply
Edit: Not only that, but you've essentially plagiarized a Vox article[1] from earlier this year. You just copy/pasted the third and fourth paragraphs from the piece without even using quotations or attributing it to someone else.
[1]https://www.vox.com/2019/1/1/18139787/rome-decline-america-e...
[+] [-] hogFeast|6 years ago|reply
Her conclusions also tend to be far too simplistic. The reason why the UK has moved to using the private sector more is because the other way was bankrupting us. She seems to believe that the public sector can innovate...okay, where is the evidence of this? The examples of successful innovation are cases where private incentives have been merged with public funding. All very suspect.
[+] [-] Mvandenbergh|6 years ago|reply
Well, she wrote a whole book about it, she's not just asserting it. The public sector played a huge part in the genesis of the Internet for one thing.
>The examples of successful innovation are cases where private incentives have been merged with public funding. All very suspect.
But another pretty critical point of that book was that our public conversation is inhibited by the extremely limited vocabulary we use to describe it. Is a defence contractor really part of the "private sector"? Is a NASA engineering team part of the "public sector" the way an employee of a mail sorting centre is? What about an academic working for an old school monopolist like Bell? Ok, fine it was privately owned so if you want to use a crude and almost useless private/public sector split it is very easy to say "private" but it's not private sector in quite the same way as a local shop is, is it?