I finally got around to reading Andrei Shleifer's rant against the public sector in the Fall 98 J of Econ Perspectives. For those of you who haven't looked at it (and I can understand why), Shleifer argues that contract theory (post Williamson and Hart) supports the idea that almost any good or service can be provided more efficiently by the private sector. He even concludes with a brief, superficial plug for educational vouchers. He does not appear to recognize that his entire approach begs the question by assuming that all workers, whether publicly or privately employed, are opportunistic and self-interested, and that only competition and/or incentive-compatible contracts can light a fire under them. This is equivalent to denying the existence of public service motives. Clearly, without an ethos of public service, government becomes stultifying and tyrannical. A rational research agenda would look for the circumstances under which public service flourishes or withers.
Well, as the co-editor of the JEP who agreed with associate editor Oliver Hart's decision that Andrei Shleifer would be an interesting person to write about the public sector (and as an ex-college-roommate of Andrei Shleifer's as well), let me say three things:
First, Andrei's major goal--at least as I understood the paper that I edited, and if it didn't come through in the published version then I messed up--was to try to break the link between the case for social democracy (in the sense of substantial redistribution of income and wealth and substantial government funding of education, infrastructure development and so forth) and the case for the public provision (in the sense of the government itself employing a lot of people and managing a lot of production). As Andrei put it to me the first time we talked about the paper, we don't have the government try to raise nutritional standards for the poor by hiring people to grow wheat on state farms which is then processed in state mills, baked in state bakeries, and then distributed through state warehouses--instead we have food stamps. And he (and I) suspect that food stamps are more effective than the state-run agricultural and nutritional center will be.
Second, Andrei's secondary goal was to explore the limitations of the traditional arguments against trying to harness the market to produce public and publicly-funded goods. The traditional argument--half of which is well-expressed by Peter Dorman--is that there is a lot of energy to be harnessed by appealing to an ethos of public service, and there are lots of times when you definitely do not want "hard incentives" because they create enormous pressure to cut the quality of the service. When the service would be produced by a natural or artificial monopoly, when consumers would for some reason be unable to vote-with -their-feet for an alternative provider (Andrei is especially scornful of proposals to "privatize" prisons), or when citizens are simply unable to judge the quality of the service, then you definitely do not want the service provided by the government handing out vouchers for citizens to use to buy it from profit-seeking firms.
But--and this is where I think Andrei's argument is especially interesting, even though I am not sure that it is true--in almost every case in which you want "soft incentives" and to harness an ethos of public service, you will find that you would prefer to have the process of production and service delivery performed by a dedicated non-profit enterprise rather than by the government at large. The government at large is likely to be too interested in cutting corners to save money to provide tax cuts, or too interested in making sure that the people employed are those who worked for the winning candidate in the last election.
Non-profit enterprises, Andrei thinks, allow you to have all of the benefits of government operation--ethos of public service, no strong financial incentive to cheat the public, responsiveness to democratic politics in the sense that the government directs the spending by providing the vouchers--and some of the benefits of market provision as well: the potential for competition, and a certain degree of insulation from machine politics and rent-seeking corruption.
In short, better to have the Red Cross than to have Ed Meese running the Federal Blood Collection Administration.
Andrei's view depends on a particular neo-liberal conception of politics and government. But it is not clear to me that such a neo-liberal conception of politics and government is false. After all, Karl Marx had some things to say about how state powers of command and control would be exercised as human progress continued...
Third, as I understand it at least, Jon Hay is under a cloud for "personally misappropriat[ing] public funds"--he appears to have let his girlfriend use an empty desk (and a telephone) at a Moscow think-tank he ran to start her mutual fund, and that Moscow think-tank [ILBE] was partially funded by USAID. Jon Hay is in big trouble. USAID's complaint against Andrei Shleifer is harder to figure out, and I have not been able to do so--after the completion of the World Bank audit it certainly does not seem to be that USAID money wound up in his pocket...
As to why we printed an article by him, it is because he seemed to have an interesting perspective to offer: that the right way to organize modern social democracies is to have public funding (of redistributional expenditures, public goods, and other socially-valuable goods and services), but to have private provision wherever we trust citizens' abilities to judge the quality of what they are receiving, and non-profit provision wherever we think that we need to guard against the strong temptation profit-seeking providers have to cut quality where they think it won't be noticed...