Peter Lyons: Market forces work against needs of society

Photo / Nick Reed

The lead articles on the evening news last week highlighted the fragility of this government's economic philosophy. The Serco debacle, the Charter schools' experiment and the Auckland housing market contain a commonality. Market forces and the self interest of the private sector do not always deliver the best outcomes for a society.

But there is a further commonality. The demise of investigative journalism has reduced the accountability of politicians for poor public policy. Because tradional media is under siege in this brave new digital world, there is less willingness to commit staff and funds to unearthing evidence and data about what is really going on in our society. Mainstream media is increasingly reactive rather than pro active.

The privatisation of prison services has a dubious record in other countries. Economics 101 teaches that in a market environment," incentives matter". A private firm such as Serco aims to maximise profits. Given that its revenue sources are fairly predictable it will aim to minimise costs as much as possible. It is likely to do this by economising on the quality and quantity of its staff.

The likely outcome has vividly played out on the evening news in recent days. Any government that chooses to privatise prison services will need to closely monitor the quality of the service being provided. The cost of this monitoring may negate any supposed benefits of privatisation. There are good reasons why prisons have historically been run by the public sector.

The Charter school experiment is based on the same philosophy. Market forces and the private sector will always deliver superior outcomes to the public sector. Charter schools are supposed to unleash a cohort of super teachers who choose not to meet the professional requirements of the mainstream teaching profession.

Charter schools provide greater choice. They do not need to employ teachers who meet the professional standards required in state schools. Unfortunately the same incentive applies as in the Serco situation. There is an incentive for the operators of Charter schools to cut costs in compromising in the quality of staff to maximise profits.
Charter schools are meant to be more accountable than state schools because they will be closed if they fail to perform.

The Education Minister response to the obvious failure of a Northland charter school is to throw more taxpayer money at it. This is despite the warnings from an independent audit by Deloittes. So much for greater accountability.

The controversy over the Auckland housing market has become absurd. Surely it is not that difficult for a government to collect prompt accurate data on who is actually purchasing houses in Auckland. This data could then be used to determine appropriate policy.

The government keeps banging on about it being entirely a supply issue. With no definitive data available this assertion appears very self serving. The government does not want hard data because this may require action. If the Auckland housing market cools, many voters in this region may start paying closer attention to what is happening to their real incomes.

Market forces and the self interest of the private sector generally do provide outcomes that are beneficial to society. But markets require governments to set the parameters. The belief that the private sector is always superior or that market forces always get it right has a very unfortunate history.

Peter Lyons teaches economics at Saint Peters College in Epsom and has written several economics texts.

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