The launch of eight new school “academies” in London, sponsored by various institutions and entrepreneurs, including Lord Harris, makes this an appropriate time to consider the economic implications of such outsourcing.
We can accept for the sake of argument that outsourcing any given “public service” to private firms under a competitive process (unlikely for academies) should bring improvements. The primary reason is that such private firms are subject to the rigour of profit-loss accounting and its resulting disciplines. The problem, though, is the services themselves, which are not subject to such disciplines. The essence of private enterprise is that from conception through funding to delivery, all participants are acting voluntarily, and a net profit therefore means a net gain. “Public services” do not have this feature; consumers may have preferred another “service” entirely. What we need is not the outsourcing of given services, but exposing the services themselves to competition.
Without this, there are downsides to expanding PSI. The review calls for “clear and consistent objectives” and “long term commitments” which in effect mean tying down a new government to a predecessor’s “services” (e.g. identity cards). Any improvements achieved will encourage governments to expand the range of “public services” under the mantra that outsourcing gives greater efficiency.
Most important of all, the taxation to fund any public services will always cause a serious net loss of output – a subject to which I hope to return. The goal must be to remove government from the scene rather than to scale back the losses. Think of the military-industrial complex; yes, the weapons companies make the conduct of war more efficient, but they also make it more feasible in the first place.