Why the state should not be a service provider

It is often observed that private enterprise must, inevitably provide higher qualities of service than the state.  It is also observed that for the private sector to provide basic services is somehow immoral, because to profit from serving people is wrong in some way.  It is also observed that, though all of this may be true in theory, in general public-private partnerships succeed no better than purely public-sector services.

It turns out that the problem lying behind all of these contradictory positions lies in the fact that they all miss the point.  What matters is not what is right or wrong, or whether or not the state is irredeemably inept: the underlying issue is a simple economic argument, which we outline below.

The argument

Any business is dependent, for its continued existence, on its paymaster, that is to say the individual(s) who provide the money that it needs to keep operating.  Therefore, the prime responsibility of any business is to guarantee that its paymaster will continue to give it money.  The success of a business therefore depends on the paymaster’s criteria for choosing to do so.

For a conventional business, existing in the private sector, the paymaster is, in effect, the consumers, that is to say the individual(s) who purchase products or services from the business.  Their criteria for continued consumption will, essentially be, that they like the services or products, and want to continue purchasing them.

For a state-financed business, on the other hand, the paymaster is the treasury.  Its criterion is very different and much simpler: it has no interest in the quality or otherwise of the business’ products, or of its consumer’s attitude towards it.  Rather, its sole criterion is this: has the business spent all of its allocated budget?

This means that, whereas a purely private-sector business has to do everything it can to make its consumers like it, all that a state-funded business has to do is to continue to spend at least as much money as it is allocated by the treasury.  Quality of performance, as measured by its consumers (if there are any) is if no importance.


Observe that this argument says nothing about the quality of civil servants as opposed to private-sector workers, their moral qualities or their competence.  It says nothing about the moral qualities of the state as an institution.  It is based purely on the observation that if a business’ paymaster is disconnected from its consumers, then it has no reason to concern itself with meeting its consumers’ expectations.

This means that any business which adopts this model is bound to provide poor consumer service, providing a neat explanation of the well-known effect that private businesses that are entirely capable of providing how quality services or products in the private sector, when co-opted into working on contract to the state, end up producing work of the same low quality as that done by civil servants.  The state funding mechanism acts as a weight that drags all engaged with it down to the same level.

On the other hand, it is notable that in situations where the state does not provide direct funding to institutions, but instead provides consumers with vouchers, or acts as their underwriter of last resort, then private enterprise is capable of providing services of the high level one would expect.  This is because the natural link between paymaster and consumer has been restored.


It turns out, interestingly, that the argument relating to the morality, or otherwise, of profiting from service provision comes closest to the truth, in observing that the issue is about how services are funded.  However, morality is not, and should not be an issue, save perhaps for the question (often ignored, for some reason) of the morality of choosing to place ideology above the quality of service provided to citizens of the country.


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