Tuesday, December 31, 2013

Free Markets and Efficiency

There has been a lot of talk about how efficient private markets are.  So, when UPS and Target had pretty major problems, it become something of a clich√© to point out that they were not making the market look so great.  I look at this issue differently -- large organizations always have efficiency, transparency, and coordination issues.  Governments get a bad rap because, by and large, they are large organizations. 

Adam Smith talked about, in the Wealth of Nations, how the streets of London were better lit because it was the municipal government providing the service.  He also had serious issues with corporations, mostly because they have precisely the issues he saw in government

So the myth that I would like to slay is that government is inherently inefficient.  Large organizations are inherently inefficient.  However, there are returns to scale that are extremely important.  It is useful to have a large polity to have a robust army -- it's not typical for the outnumbered army to win due to quality unless the size gap is small (just ask Napoleon about Russia).  But nobody would think Russia in 1812 was a more modern or efficient society than France. 

So this doesn't mean that we shouldn't have corporations (or government for that matter) or that we shouldn't ask for better administration (we should).  But it does mean that we should think carefully about what things are best done by which kind of organization.  It's not shocking that Kentucky (smaller than the federal government) seems to have implemented health care exchanges more efficiently.  On the other hand, a uniform legal system is something that we want implemented as broadly as possible and for which we are already willing to accept some efficiency trade-offs.

So I think the real issue is that real life is a game of rock-paper-scissors-lizard-spock.  Picking the correct level at which to solve a problem is half of the battle.  Target, for example, is a fine retailer and I have had a lot of positive shopping experience there.  I use UPS and Amazon all of the time and I am delighted by the median level of service.  But I was caught in both the Target hack and had a present for my wife come the day after Christmas.  I recognize that everything is a compromise.

So I guess my wish for the new year is that we could reframe the debate into "better government" and "better business" -- just improving matters in general.  That might be a much more useful approach to the whole debate.

And, before I forget, Happy New Year from OE to our readers. 

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