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Saturday, November 08, 2003


In case you didn't catch this article in The Economist last week, I thought you'd be interested. The article doesn't go very deep, but the ideas are interesting enough to make me want to pick up the referenced book. The basic concept is what I've long contended, i.e., that the power of markets can be used for provision of public goods.

Economics focus

Power to the pawns

Oct 30th 2003
From The Economist print edition

For excellence in public services, should societies rely on altruism or self-interest?

EGALITARIANS are instinctively suspicious of market forces. Markets breed inequality, they believe. In ordinary markets, that may well be true. But this fact should not blind egalitarians to opportunities for using “quasi-markets”, which combine market forces and public money, in ways designed to promote equality. So argues Julian Le Grand of the London School of Economics in a fascinating new book.

“Motivation, Agency and Public Policy: Of Knights and Knaves, Pawns and Queens”* examines the theory and practice of “quasi-markets” for public services. The book is short, accessible and profound. Drawing on theory, case studies and surveys of the literature, Mr Le Grand argues that the left is missing a trick. Market forces, he says, can often serve its goals better than the methods socialists and social democrats generally favour.

The left's distaste for mixing markets and public services springs partly from two deep-rooted ideas. One is that governments and their officials, when acting as providers, do what they think is good for society, not what they think is good for themselves: as Mr Le Grand puts it, the left assumes that providers are “knights” not “knaves”. Second, the left sees recipients of public services as having no scope for action on their own initiative. Citizens act as they do because of the economic environment into which society has put them. As consumers of public services, they are passive beneficiaries: “pawns” not “queens”.

Mr Le Grand argues that these beliefs are not only wrong but also anti-egalitarian. He shares the left's concern about the inequalities that arise in ordinary markets, but this issue is not to the fore in the quasi-markets he concentrates on. Governments often pay for universal access to public services such as schools. The question in such cases is whether those public services—which may well matter more to the poor, who lack alternatives, than to the rich—are any good. The point is that properly designed quasi-markets improve quality and value for money.

Mr Le Grand does not arrive at this conclusion by agreeing with those economists and right-wingers who see public-service providers and recipients alike as one-dimensional self-interested “maximisers”. Policy needs to recognise, he argues, that public-service providers may be motivated simultaneously by altruism and by self-interest. And though some recipients may regard themselves as helpless, policy should try to increase their power over providers—to turn pawns into queens—both because that would promote efficiency and because, from an egalitarian point of view, it is desirable in itself.

The idea that altruism and self-interest are both at work in the supply of public services has interesting theoretical implications, which Mr Le Grand teases out. For instance, how does supply react to price? An altruist will supply some services even if the payment received is zero. A small payment, if it were seen as recognition of the provider's sacrifice, might then encourage additional supply. But increase the payment further and you could discourage supply, by tainting the event as a market transaction and reducing the altruist's intrinsic reward. If the payment were then increased further still, the supply of the service might start to rise again, in the standard economic way, as the positive power of self-interest overwhelmed the diminishing power of altruism. In short, a mixture of the two motives can produce a wobbly supply curve.

Mr Le Grand draws lessons for policy from this and from other theoretical explorations. One rule of thumb is that incentives in quasi-markets need to be framed, as far as possible, so that they appeal to both knightly and knavish instincts, rather than concentrating on one or the other.

The book's discussion of competition among schools shows what this might mean. The key supply-side decision-maker is the head teacher. Heads may have both a knightly and a knavish interest in the financial well-being of their schools: the first because financial strength allows them to do a good job for their pupils, the second because financial incompetence may mean the sack. It need not matter which interest is uppermost. In either case, heads have reason to respond to market pressures that affect their finances. Parents armed with choice and information—better still, with vouchers too—can supply the market pressure, appropriately tuned to educational performance. In practice, as Mr Le Grand's review of the evidence shows, it seems to work.

So, he argues, might a range of other policies, likewise framed with quasi-markets in mind: greater use of tax hypothecation (earmarking), for instance, or “demogrants” (publicly financed grants of capital to young people) of the kind that Britain's Labour government has announced.

Moral uplift
Sceptics will nonetheless feel that there is something morally diminishing about self-interest—that such a motive erodes trust and the public-service ethos. It follows from Mr Le Grand's arguments that this can sometimes be true, but also that it need not be. With care, policies that recognise self-interest can reinforce the power of altruism (as when a small payment calls forth an increase in supply); and it is desirable in itself to attack that part of the public-service ethos that treats recipients as mere pawns.

The book ends by drawing attention to the classical-liberal tradition that makes an even larger claim. Markets can be not only empowering, efficient and equitable; not only moral in the sense that they can reinforce altruism; but they may also civilise people's behaviour towards one another. As Montesquieu put it: “commerce...polishes and softens barbarian ways.” Unlikely, you say? Read Mr Le Grand's splendid book, which adduces some intriguing modern evidence in support of this idea too.

*Published by Oxford University Press

Copyright The Economist, October 30, 2003

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