Private Sector Inefficiency

Here’s Arnold Kling:

[T]here are many examples of market failure. And maybe you can do things to reduce government failure. But in the end, there is the issue of dynamics. Market failure tends to be self-correcting, because entrepreneurs have incentive to fix things. For government failure to be corrected, somebody needs the insight to know how to correct it and they need to overcome the political opposition to changing the system. In practice, the change does not happen. You cannot get rid of the mohair subsidy.

It is not just that special interests can gum things up. It is that however things get gummed up, they are persistently gummed up in an institution that is insulated from market competition.

There are very, very few people who think the government should be left in charge of everything. Most people thing there’s a role for government… the question is, how big a role.

Kling seems to be implying that the market prevents companies from being insulated from competition. Frankly, I’ve worked in the private sector – sometimes doing work for the military, but usually not – since graduate school, that is, since 1996. And I don’t see the much vaunted private sector efficiency.

What Kling ignores is that there are many things that allow the private sector to maintain inefficiency forever. Economies of scale, inertia, threatening to undercut rivals should they enter, buying out more efficient competitors (and destroying what made them efficient – see telecom industry), etc. And it seems its often easier to simply produce the same garbage for the decades it takes to go out of business than it is to fix things since competition is usually against others with the same philosophy.

Kling talks about the mohair subsidy… that’s been around since 1954. How long has Ford been around? Or GM? Or are those examples of companies operating at peak efficiency? Its going to be a decade long process, but I bet the mohair subsidy he points to will last fewer total years than GM. And its certainly a lot smaller.

I don’t know what the solution to inefficiency is. But the private sector isn’t doing it very well.


Craig Newmark is more of a believer in Kling’s point of view.