The State-market Policy Continuum

James Hanley at Positive Liberty points out:

These are folks who think Blackwater is an argument for government. That’s right, the government hires a firm that goes off the rails and kills citizens, then protects it from prosecution, and that somehow justifies more government.

People sometimes point to examples of marketish policies which have produced results worse than more governmentish policies, and suggest that this is evidence against the desirability of markets. This is a flawed way of thinking, and seems to involve imagining a simple continuum between state-focused and market-focused policies, and implicitly assuming that desirability rises and falls monotonically around some optimum balance between the two.  

This imagined continuum suggests that if some marketish policy is worse than a more governmentish policy, we can conclude, a fortiori, that moving further in the market direction will be worse still. Hiring private military contractors is further toward the market end of the spectrum, and is worse than plain old government-provided military (I’m agnostic on whether this is the case, but assume for the sake of argument that it is), so we can conclude that any other more marketish policy in defence will be even worse than the Blackwater situation.

I have encountered this way of thinking many times when arguing about health policy reform in New Zealand. New Zealand has had government-funded and provided medical care since 1938. Until the 1990s, healthcare had been directly provided to the public with purchasing and provision combined in the same organisation. This was classic government bureaucracy, with nothing resembling price signals or competition, and thus at the state end of the market-state policy continuum.  

In 1993, the health system was significantly reformed, with the intention of making it more market-like through decentralisation and the injection of competition, while retaining public funding. Purchasing and providing were split, with public hospitals, and potentially private competitors, providing care as directed by contracts with distinct public health boards. Informed opinion is slightly divided on whether the reforms were on balance desirable or undesirable, but everybody agrees they failed to produce the huge efficiency gains imagined by proponents. I tend to see them as mildly harmful: there were very modest allocative efficiency gains but significant increases in transaction costs. In any case, the new system was very unpopular and the reforms were quickly reversed (somewhat in 1996, then completely in 2000).

In one sense, the quasi-market was clearly more marketish than the monolithic* bureaucratic system it replaced. The system, however, remained predominantly state-funded and provided, and with no competition on the purchasing side (the original proposal, which was watered down for political reasons, would have created a true voucher system which I suspect would have been a huge improvement).

Injecting some market-like features into a public system does not necessarily make it perform better. Unless we assume a single-peaked relationship between desirability and marketishness, the failure of such a system is not an argument against a genuine market system, or even some other type of market-state hybrid. It is entirely possible that moving some way toward more marketish policy will produce worse results than the status quo, while more radical marketish policies will be an improvement.     

*The pre-1993 system was less geographically but more functionally centralised than the 1993-1996 quasi-market.