Cfrtjryk

Why so many of our public institutions inefficient? May be they are not, may be its just apparent. But I have indeed experienced the carelessness of the government bureaucrats, the assurance of them not losing their jobs no matter what, makes them behave utterly careless (atleast in India, say in a Municipality office). If the way ahead is more democratization of the workplace to fight the current levels of inequality, how would one tackle this peculiar behavior in public workplaces?

There is no one answer, because some agencies are more efficient than others.

For example, Medicare is much more efficient in processing and paying medical claims than private insurance companies are at the same task. Similarly, Social Security is more efficient than almost any private sector retirement plan in existence. The U.S. Department of Education took over direct servicing of student loans because that turned out to be more efficient than what the private sector was doing.

Also, in some cases, it is hard to compare because there is no close private sector counterpart. One could say that the Department of Defense is very inefficient, but their its no private sector counterpart running the largest military force in the world by many measures. One could try to compare, for example, the efficiency of military defense procurement projects done by private companies under contract with the government to private sector manufacturing enterprises of other kinds, like automobile manufacturers. But, private sector manufacturing is arguably under pressure to produce very different objectives - the best possible outcome at an affordable price, rather than the best possible outcome at any price because losing means the end of civilization as we know it.

There are also areas where there is considerable private sector competition with public sector institutions, providing a means of comparison, but the public sector institutions aren't notably better or worse in efficiency than the private sector counterparts and both are equally inefficient. There is a good case to be made that this is true of schools, colleges, universities and hospitals. There is likewise no compelling evidence that private prisons are run more efficiently, controlling for the makeup of the prisoners supervised, than public prisons.

Certainly, this isn't to say that there are no areas where the private sector does not get the job done better and cheaper than the public sector. But, even in those cases, this isn't universal. Some countries, like France and Sweden, do a particularly good job of public administration. Indeed, the most prestigious university in all of France is a school for public administrators. Other countries, like the U.S. are less good at public administration.

But, as these examples illustrate, there is no one compelling reason.

Probably the most powerful reason that the private sector is sometimes better than the public sector comes from countries with lots of state owned enterprises. Comparisons in those cases indicate that the single biggest factor is that money losing private businesses promptly go out of business or are reorganized in bankruptcy, while money losing state owned enterprises are often subsidized and kept in business for a long time.

Just like anything else, most things humans do arise out of incentives.

• A private company employee has incentive to be efficient because if they are not, their manager has incentives to fire them, and replace them with a more efficient employee.




• A private company manager has incentive to do that because efficiency has direct impact on productivity and/or customer satisfaction; both of which have direct impact on revenues; due to competition (a low-productivity producer must charge more leading to customers picking competing product; unsatisfied customer can also chose competing product).




• A private company manager has incentive to care about revenues because on the upside, if revenues are higher, they get better pay; and promotions; whereas on the downside, if revenues are sufficiently lower, they get fired in layoffs; or in worst case, company goes under and everyone loses their job.

Now, compare that to public institution. Those institutions are characterized by 3 features:

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  Monopoly and lack of competition.

  
  
  

  If you as a customer do not like the product or a service offered by a private institution, you are typically S.O.L. There is usually no competing product or service being offered; due to a government rule, law or mandate. You cannot choose to get a driving ID from a private company if your motor vehicle department works poorly or demands bribes. You cannot have your house improvements certified by a private inspection company, you have to wait for a never-in-a-hurry government bureaucrat to do that.

  
  
  

  Or, the service or product has barriers to entry too high, due to scarce resources. For example, water delivery requires physical pipes, so a private company would be unlikely to be able to do this at a competing price. Ironically, this isn't unique to public institutions - same problems caused the rise of landline phone monopolies earlier and wired Internet service provider monopolies nowadays.

  
  
  

  Or, in case of some services, the competing private ones cost too much for the poor; and government one is the only available option within near-free price range (as the service is subsidized by government budget).

  
  


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  No need to ensure revenue.

  
  
  

  Revenues for public institutions are generated by forcing taxpayers to pay taxes and allocating government revenue by the government out of that. As such, there is no direct impact on revenues from quality of service or product; or productivity^[1].

  
  
  

  _{[1] - one could argue there is an indirect impact in that poor service/product may lead to lower overall economic growth which leads to lower tax revenues down the line. But that is way way too indirect to matter in this case.}

  
  


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  Employee incomes are not correlated with efficiency.

  
  
  

  If you work better at a private company, you have a chance of being paid more (performance bonuses, pay raises) - see the incentive structure above. At a public institution, they pay is typically very static, with no performance impact on compensation.

  
  


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  In some cases, it's impossible or difficult to fire poor performers, even if the institution and its managers would want that.

  
  
  

  First, there are unions. At least in USA, public institutions are far far far more heavily unionized than private ones. Second, there are rules about firing people in public institutions, as the employer is "government".

  
  

Others have noted the issues with incentives and competition, but there is actually another reason, which is dis-economies of scale.

Back in 1937 economist Ronald Coase asked the deceptively simple question: "why do companies exist?". He reasoned that if the open market was the most efficient way of getting things done then firms (i.e. companies with lots of employees) shouldn't exist; the economy would consist entirely of individual contractors. However firms do exist, and different markets seem to favour different sizes of firms. This led him to set out his "theory of the firm".

As a company grows it can exploit economies of scale; if you make 100 widgets a week it costs $2/widget, but if you can make 1,000 widgets a week you can reduce the cost to $1.90/widget by increasing automation, using your staff in more specialised roles that require less training, getting bulk discounts on your inputs, and so on. Hence in the widget business companies grow or go out of business; the company making only 100 widgets/week is not going to be able to compete with the one making 1,000/week.

So why isn't the economy dominated by a single giant monopoly in everything? The answer is that increasing scale brings dis-economies:

• Coordination becomes more difficult. The guy on the factory floor may realise that screw No. 7 is difficult to get in, but that information doesn't get back to the design department where it could be fixed.




• New products take longer to bring out because of the work required to retool and reskill the production line.




• Employees no longer need to work hard to "succeed". Instead they are given targets and can relax once these are achieved. Their managers have no incentive to make these targets a real challenge because then they would be seen as failing too. This disincentive goes all the way from the bottom to the top, which is why so many CEOs pocket big bonuses for lack-lustre performance.




• Some middle managers also play empire-building games, seek to undermine each other, and generally mess up the efficiency of the company.

So in any industry there is an optimum point where the economies of scale due to additional growth are matched by the dis-economies. Companies in this industry will tend towards this size.

Now consider the government. It is probably the biggest organization in the country, doing a vast range of different jobs under very variable circumstances. The result will be huge dis-economies of scale.

Public institutions are inefficient because they are removed from the natural market place.
They don't have any competition. Private businesses must be efficient to succeed in a free enterprise market economy. When you have a monopoly on any good or service there's zero motivating factors to increase efficiency.
Also add the bureaucratic attitude that all government agencies inherently have, which is a need and desire to spend all allocated funds or risk a reduction in those funds in the following year; combined with a tenor based, versus a productivity based, pay scale and you have a tasty recipe for low productivity.

I've worked at both private and public institutions. Neither seem significantly more or less efficient than the other - there's tons of waste in private institutions but people don't seem to care about that as much.