Food for Thought?

“Private firms efficiently finance their operations or they fail”

Clifford Winston, Brookings Institution. 

There are a lot of implied assumptions here!  Where do we start?

A major implication is that private firms must therefore be more efficient than public firms, but this makes a massive assumption –  namely that the losses to the community from those private firms that fail is of lower consequence to the community than inefficiencies of public sector organisations that are not allowed to fail.

Where has this ever been rigorously and neutrally examined?   And if it had – why would we have persisted so long, throwing good money after bad, at the UK private sector firm, Carillion?   Carillion, which employed 43,000 people to provide services in defense, education, health and transport, collapsed in January, becoming the largest construction bankruptcy in British history. It left creditors and the firm’s pensioners facing steep losses and put thousands of jobs at risk

We tend to regard as heroes those entrepreneurs that go bankrupt –  perhaps many times – and then come back and make a fortune.  That latter fortune, however, is financed (involuntarily) by many small entrepreneurs and their families, some of whom may well have gone out of business because the work they did for our bankrupt hero was never paid for.    

There have recently been a number of very large and very public failures in the banking system  that have created enormous public havoc.  These banks cannot ‘go bankrupt’ but can – and are – bailed out by the public, which is the equivalent.  Without this ‘safety net’ and the incentive to make a profit ‘no matter what’, would a public banking system, such as we once had,  have fallen prey to the sub-prime mortgage debacle?

Have the so-called ‘efficiencies’ created by a private banking system been systematically weighed against the costs?  I suspect that this is an area where we are acting in ‘blind faith’.  It has to be blind because there is so much to the contrary that we can see if we but look. 

Another aspect of this faith is the presumption that anything that we may say in favour of private sector or ‘market‘efficiency’, still holds true when the private sector is propped up by government contracts (e.g.public toll road contracts). 

I am not arguing that there are not problems in the public sector.  There are. But would it not be an idea to address these problems directly rather than advocate private provision where there are also problems  – but they are less amenable to correction?  

When are we going to get that definitive examination of Carillion and hold them responsible?