krugman on privatization

Paul Krugman writes on the ills of privatization today in NYT (click this sentence to go to the story.)

I sometimes get frustrated with Krugman’s approach to his NYT column because he seems (at times) to depend more readily on his visceral inclinations than marshaling forth objective evidence that supports his argument. The fact is that most of the contentions he makes can be justified in such terms, and he has a Nobel in Economics for providing insights through objective analysis derived from the scientific method and a deep appreciation for historical context. That’s why columns like this are so frustrating. Krugman’s larger point about the problems of privatization is spot on, but the dependence on ideological frames automatically inhibits the ability to have a genuine debate about the economic and moral consequences of privatizing public goods.

Krugman’s argument falls flat by characterizing the motives of individuals across the conservative ranks. He argues that privatization advocates (who he implies are mainly conservative) are pushing this prescription in order to advance their patronage concerns. This is certainly a plausible and justifiable hypothesis, but evidence must support this notion. The fact is that many of the most prominent privatization advocates are neoliberals from the Clinton administration. Krugman is unable to point us to any reasonable substantiation of his argument on patronage, although some ancillary and circumstantial support exists. Since this argument does not hold up to the basic scrutiny of observable evidence, a better argument would emanate from the language of transaction cost economics or by assessing the validity of the assumptions made in the theoretical arguments supporting privatization.

In the late 1970s and early 1980s, material and ideological conditions created new perspectives on the relationship between the administrative state and citizens. The civil rights movement and the perceived failures of the Great Society induced a deep distrust in government across different demographic backgrounds. There was a combination of economic stagflation, political corruption associated with scandals such as Watergate, an overreaching social welfare agenda, and a globalizing economy brought together through media transformations (Kettl 2004). Riding the waves of discontent, a neoliberal philosophy emerged that was primarily oriented with monetarism and public choice economics (Stillman 1998). Government was not perceived as the solution to public problems any longer, rather as Reagan famously argued “government was the problem.” This produced a movement to decentralize and downsize government, accompanied by a severe retrenchment of its regulatory role. Reflecting this perspective within public administration scholarship, a movement called “new public management” attempted to reconceptualize the role of public administrators on the foundations of public choice scholarship and broader organizational theory (Peters and Pierre 1998).

Public Choice scholarship borrowed many of the principles and analytic tools of microeconomics, assuming utility-maximizing individuals. This scholarship appealed to neoliberal adherents because its formal empirical models helped legitimize the use of market mechanisms as producing the optimal outcomes for public consumption. It viewed politics as the aggregation of private preferences. As such, homo politicus became conceptualized the same as homo economicus (Buchanan 2006). Thus, one of the main tenets of this philosophy is that private actors will engage in “rent seeking” in which they will use policy to maximize their individual preferences (e.g., porkbarrel policies). Bureaucrats became “budget maximizers” (Niskanen 1971), and formal and logical theorems produced the call for increased competition between agencies and between the public and private sector (V. Ostrom 1973, Tiebout). The problem is that the “budget maximization” argument has not been upheld empirically to the threshold of even moderate generalizability. Why? The very assumptions that drove these models were problematic. Homo economicus has largely been debunked as a fallacious conceptualization of human behavior. Yet, classic microeconomics adherents continue to promote these notions as undeniable truths. The largest advances in theories of human behavior have emanated from cognitive psychology, where theories of self-determination and intrinsic motivation have allowed us to revisit human relations theories of organization and organizational behavior. According to these theories (and supportive empirical evidence), individuals do not seek to maximize profit (or budgets in the case of bureaucrats). They seek to maximize autonomy, satisfaction, and competence. The same behaviors can apply in private sector organizations, of course. However, there is also evidence that the intrinsic motivation of individuals within public sector organizations is tied to employees’ propensity toward prosocial behaviors and organizational missions that are arguably more directly tied to the advancement of public interests.

Behavioral theories of organization, meanwhile, have long rejected the notion of hyperrationality that economists require in their models of market efficiency. Included in this umbrella of research, transaction cost economics brought attention to the costs associated with negotiation, monitoring, goal incongruity, and information asymmetries that are inherent to delegation between one entity and another. Additionally, public administration and policy research pointed to the lack of market diversity around public monopsonies. Thus, the transaction costs of negotiating contracts in a limited market could quickly outprice the cost of doing things “in-house.”

By tackling both the problematic assumptions of neoclassical economics and public choice conceptualizations of organization behavior, while simultaneously marshaling observations from the transaction cost economics literature, Krugman could level a pretty solid attack on the privatization prescription. And this is in terms of economic efficiency! There is plenty more fodder available from a Constitutional law perspective–notably, what constitutes inherently governmental activities.

Krugman’s column correctly brings awareness to a critical issue in modern governance. But, his approach devolves into a polemic that simply is not necessary to tackle the weaknesses of the privatization argument as a panacea to public management issues. Krugman is capable of making this argument in a much more elegant and convincing way that I am. Unfortunately, he reverts to polemics that do nothing to advance our public discourse.

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