Peter Levine

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August 10, 2010

states versus markets (a somewhat different take)

On a major blog some months ago (unfortunately, I can't find the link), the blogger complained about his Internet-service provider, and a debate ensued in the comments section about whether corporations or governments are worse. One writer remarked, in effect: Companies can be as bad as government agencies, but when a company mistreats you, you can just walk away. It's irrational to get all worked up about that. When the government wastes your money or time or gives you bad service, it's an outrage. The author concluded that markets are better than governments.

I have a somewhat more complicated view. I think it is smart to minimize your emotional reaction when a company performs poorly; just take your business elsewhere, if you can. It is more appropriate to be angry at government because:

• It usually offers less choice or none at all, which is frustrating.
• We have a legitimate sense of ownership and identity with our government. It is "ours." Its bad performance is a matter of deeper significance for us.
• The mechanism of reform in government is "voice," not "exit."* Government services improve when some citizens (perhaps including state employees) take it upon themselves to complain and advocate for change. That can also happen in a marketplace, but the main mechanism for improvement in a market is Darwinian. Customers are supposed to move their money to the best-performing companies and not provide free advice. So we should hope for frictionless, unemotional decisions in a market and periodic expressions of anger in the public sector.

The question is whether, when, and for what purposes we want to rely on voice versus exit as the mechanism of improvement. I see the advantages of exit and competition and am therefore biased in favor of markets as the means for delivering ordinary services. But there can be at least three powerful rationales for state involvement:

• To promote equity. Markets don't deliver services to everyone. For example, there is virtual consensus in the US that governments should fund universal k-12 education, a view shared even by market-enthusiasts who believe that education should be delivered by private schools. Unless the government funds education, being born poor will be a life sentence to poverty. That means that we hold the state accountable for education even if it chooses to outsource the work of educating. Voice is inescapable.
• To promote security. Governments are in the security business when they guard our borders, arrest criminals, prevent pollution, regulate markets, or provide fundamental services to people in need. We can debate which forms of security are appropriate and whether the government should directly provide them or else fund private entities to do so. But again, when we believe in some form of society-wide security, we hold the government accountable for results and use voice to express dissatisfaction.
• When we feel a sense of ownership in an object. For example, Americans think of the national parks as theirs. If they don't like the services at Yellowstone, they are not going to be happy switching over to some private resort. It doesn't matter whether the National Park Service does the work at Yellowstone or outsources it; as long as people feel they own the park, they will hold the federal government accountable for it. This feeling is socially constructed, not inevitable. We could feel ownership over different acres instead of Yellowstone--or none at all. But the initial creation of the National Parks was popular and has been validated by decades of public opinion.

To complicate matters, all markets are (at best) imperfectly competitive, and there can be choice and competition among governments (because individuals and companies can move). Thus voice is sometimes appropriate in the private sector; and exit sometimes matters in the public sector. Also, communities as well as governments can own public resources. Finally, some private corporations own resources that people identify as theirs--for instance, fans identify with their local professional sports teams. In such cases, whether to honor voice is the company's choice, but it is often a wise one.

* Albert O. Hirschman, Exit, Voice, and Loyalty: Responses to Decline in Firms, Organizations, and States (Harvard, 1970)

August 10, 2010 9:21 AM | category: none

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