Markets, public services and social justice

by Stephen Tall on February 13, 2006

Sorry, I keep doing this – replying to people’s comments in articles at such great length that I then feel compelled to publish them as new posts. Both Joe Otten and Neil Fawcett asked me some very good questions in response to my What is an Orange Booker? article. As I have said in my reply, but edited out below, I don’t have definitive answers: this is thinking in progress, and offered up to those who want to read it very much in that spirit…

I think a lot turns on our answer to ‘what is a market?’ When I use the term I don’t mean a purely cash transactional economy. I mean a market in its most basic sense: the most efficient mechanism for allocating scarce reources.

As it happens, I therefore think markets are not only wholly appropriate for (eg) health and education – but that they are absolutely essential. ‘Need’ (however defined) in the NHS will always exceed the resources society has available. So how these scarce resources are allocated most efficiently – ie, how a finite pot of cash can help the most people – is crucial.

Markets give us the tools to make the tough choices we know need to be made. Those choices will need to be made, whether power is held at local or national level (though the more local the better, as far as I’m concerned).

The currency in a market does not always have to be cash. I’m interested in how we can get beyond the idea that markets are simply about fitting a number to anything that moves – because if you measure quality, it comes out as quantity.

I would also accept the point that various parts of all public services are natural monopolies, not least because of imperfect knowledge (eg, a doctor will know far more about overian cancer and how to treat it than will the patient). But, even there, we accept that there has to be a form of market – we might want a team of specialist cancer units in every major town in the country, but know we can’t as a society afford it or staff it.

The decision as to how many specialists, and where they are based, has to be taken by managers / politicians somewhere. To make that choice of how to allocate those scarce resources they need to work out how they can spend money to best effect.

Perhaps they can develop a specialist unit in one area of cancer treatment because the next-door town specialises in another form? In which case the two hospitals will, through healthy competition, become greater than the sum of their parts.

Ultimately my belief (I’d try not be as theological as to term it faith) in markets is based on my conviction that healthy competition raises standards. I don’t mean dog-eat-dog competition. But competition in which each service provider works out what can be its point of competitive advantage; how it can best serve the wider public good.

That is what I mean by liberal market delivery of public policy goals, and why I think those markets are the engine of social justice.

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That is an interesting post Stephen.

I am still not quite clear what you mean by ‘market’.

By ‘market’ I mean a process whereby a price for a service or good is fixed by the the conjunctio of supply and demand.

If I understand your post correctly you are using ‘market’ in a much broader sense?

If a system involves politicians or bureaucrats making decisions about what resources are allocated to different services then it is not what I would call a market.

by Liberal Neil on February 14, 2006 at 1:52 am. Reply #

As Neil suggests, you are expanding the concept of market, just as I expanded the concept of economic liberalism here:

We both will horrify purists.

But hang on, all attempts to “reform” public services are not true markets, not people spending their own money on health and education, but different ways to do things a bit like how free markets would do them. So you are in good company.

I guess my point now would be that this is such a vague proposition that there is no telling whether it would do any good or not.

That there should be specialisation, and competition, we would agree. But what mechanisms are there to manage them? Specialisms and standards can be managed in some respects by professional bodies.

There is competition if everyone simply wants to be the best.

Neither, yet, requires a market. If the response to one cancer department achieving consistently better outcomes than another is to expand the first and close the second as part of a planned investment strategy – this isn’t a market mechanism because it is not the customers who are choosing. Expecting patients to know which department is better is unrealistic. GPs could know but it would take some work from them if they aren’t to rely on hearsay.

Planning is a dirty word these days, (thanks to us economic liberals), but I would rather make a pragmatic choice here. If the money follows the patient, then providers take big risks when they invest in capacity, because the patients may go elsewhere. Whenever investement is too high or too low there is inefficiency. These are real costs, and any added competition would have to bring benefits big enough to outweigh them.

by Joe Otten on February 14, 2006 at 9:52 am. Reply #

This time I really will be brief!

Neil: “markets = a process whereby a price for a service or good is fixed by the the conjunction of supply and demand.”

Yes, but… what I’m attempting to feel my toward is how we arrive at that price. I think a £ sign needs to be our starting point; but I don’t think it should be the sole determinant of the value we place on a service or good. It comes back to my open question of what ‘currency’ we use. How do we measure quality without turning it into quantity?

Joe: “There is competition if everyone simply wants to be the best.”

But competitive adavantage occurs when an organisation works out what it wants its reputation to be. Even if it can be good at everything, would it not be better trying to be excellent at some things? Unless there is an internal economy, which measures what it does simply well against what it does really well, it won’t know what choice to make.

In my college, an academic colleague of mine summed up very neatly how we should plan our future developments: ‘we need to know the academic costs of our economic decisions, and the economic costs of our academic decisions’. I think this can be applied to the public sector more generally. Markets are the place where I think we can credibly test the robustness of these assumptions.

by Stephen Tall on February 14, 2006 at 10:13 am. Reply #

Neil said: “By ‘market’ I mean a process whereby a price for a service or good is fixed by the the conjunctio of supply and demand.”

Yes, price is an important tool with which the markets can get information of the supply and demand. If the price raises, that means that there is more demand than there is supply, and the producers know that they should increase the production. If the opposite happens, they know that there is more supply than demand, and they will decrease the production. That is exactly the mechanism which makes the markets flexible and efficient and in some kind of balance. And that’s exactly the reason why the private sector can react to a changed demand quicker than the public sector.

For more detailed information, see F. A. Hayek’s essay The Use of Knowledge in Society.

If you want to ensure that everybody can afford to reach certain services, you can achieve that by just giving them enough money, or distributing them vouchers, or buying them an insurance. That kind of social security wouldn’t damage the market mechanisms too much,and would keep the production of the public services lean and effective.

by Anonymous on February 14, 2006 at 10:45 am. Reply #

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