Re: [PEN-L:2284] Re: Shleifer and Incentives

[Peter Dorman <dormanp@xxxxxxxxxxxxxxxxxxx>]

 apologize for the lateness of this reply, but I've had a heavy bout of
teaching and have not had time to take a second look at Shleifer until
today.

To refresh memories: I had made the criticism that Andrei Shleifer, in
his piece in the fall 1998 JEP, assumes away the existence of public
service as a motive and then "proves" that nearly all services should be
provided privately.

I reread Shleifer (although admittedly not the more elaborate work on
which his article is based) and see no reason to change my mind.

Shliefer's theory of soft incentives goes like this: We know that
private, profit-seeking firms minimize costs.  Nevertheless, there may
be instances in which cost minimization would lead to shortcuts the
public would oppose.  Thus an argument could be made for public
provision precisely because cost minimization would be avoided through
soft public incentives.  Says Shliefer, this doctrine has limited
applicability due to the great dynamic advantages of private, for-profit
production (innovation), opportunities for members of the public to
choose between providers (so they can punish shortcuts), and the
possibility of using private, non-profit providers in certain cases.

So, does Shliefer assume away public service motives?  Of course.  He
assumes them away first by positing that private, competitive production
achieves cost minimization more readily than public production.  But an
important aspect of public service is the willingness of workers to go
"beyond the call of duty" (job description, what they are paid for), and
this can have tremendous cost-reducing consequences.  Many public health
services, for instance, are provided more cheaply than their private
counterparts, because of the extra work health professionals will
perform if they serve the public directly, even though they are
typically paid less.

His second assumption is even more outlandish, because it contradicts
the logic behind "soft incentives".  Why should highly motivated public
servants produce less innovation than private sector workers?  If
someone has an idealistic commitment to the provision of a service or
achievement of a goal, this should be reflected equally in static and
dynamic choices.  The best example of this is the work we all do:
academic research.  Relatively few researchers are employed by
for-profit institutions; many are employed by government.  Their primary
motive, we hope, is the advancement of knowledge, a form of public
service.  (Even many private companies that maintain large R&D shops
have found it useful to replicate internally the atmosphere of a college
campus, with substantial worker autonomy in setting the goals and pace
of research.)

It should also be added that Shliefer fails to recognize that a primary
basis for public provision is the belief that particular qualities of
the good or service in question have a value from a public perspective
that differs from the sum of the private valuations that a market would
perform.  This is obviously true of schools, parks, social welfare and
public health services, etc.  A rousing case for this is made by Mark
Sagoff in his still-relevant book "Economy of the Earth" (Cambridge,
1987).  I get the sense that Shliefer can't even begin to conceptualize
a difference between aggregate consumer willingness to pay and public
value.  (This does not mean that notions of public value, like Sagoff's,
are unproblematic, just that they are indispensable and play a large
role in real-world political debate.)

So in the end I would say that Shliefer's piece remains a rant.  He
assumes away the basis for all counterargument and then announces that
those who disagree with him have no arguments.  (You know how these
mushy-headed types are, they haven't studied serious economics and don't
realize their positions have no foundation.)

I thank the people who have posted more information on the Russian "aid"
follies, although I don't know enough to pass judgment on Shliefer's
personal role.  Nevertheless, I am not surprised that someone whose
moral universe is so bereft of public, as against private, values has
got caught up in this mess.

Peter Dorman

Brad De Long wrote:
>
> >Peter Dorman wrote:
> >
> >>
> >>
> >>   ------------------------------------------------------------------------
> >>
> >> Subject: Shleifer and incentives
> >> Date: Fri, 15 Jan 1999 13:12:03 -0800
> >> From: Peter Dorman <dormanp@xxxxxxxxxxxxxxxxxxx>
> >> Reply-To: pen-l@xxxxxxxxxxxxxxxx
> >> References: <001501be3fd1$f6c56940$3bf246d1@xxxxxxxxxxxxxxxx>
> >>
> >> 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 tyrranical.  A rational research
> >> agenda would look for the circumstances under which public service
> >> flourishes or withers.
> >>
> >> But I'm not getting to the point.  What I found utterly surreal about
> >> this article is that its author is under a cloud for having personally
> >> misappropriated public funds.  So he is really modeling himself, and his
> >> own crass opportunism.
> >>
> >> What is the current status of the charges against Shleifer?  As I
> >> recall, USAID cancelled its contract with his unit at Harvard and
> >> initiated legal action.  Is the action still pending?  Does anyone out
> >> there have more information on this case?  And why would JEP print an
> >> article on this topic by someone in Shleifer's situation?
> >>
> >> Peter Dorman
>
> 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 goverment 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...
>
> Brad DeLong
>
> -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- --
> "Now 'in the long run' this [way of summarizing the quantity theory of
> money] is probably true.... But this
> long run is a misleading guide to current affairs. **In the long run** we
> are all dead.  Economists set themselves too easy, too useless a task if in
> tempestuous seasons they can only tell us that when the storm is long past
> the ocean is flat again."
>
> --J.M. Keynes
> -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- --
> J. Bradford De Long; Professor of Economics, U.C. Berkeley;
> Co-Editor, Journal of Economic Perspectives.
> Dept. of Economics, U.C. Berkeley, #3880
> Berkeley, CA 94720-3880
> (510) 643-4027; (925) 283-2709 phones
> (510) 642-6615; (925) 283-3897 faxes
> http://econ161.berkeley.edu/
> <delong@xxxxxxxxxxxxxxxxx>