Tuesday, October 11, 2011

In Pursuit of Efficiency in the Private Sector

I’ve been thinking a lot about this great debate going on in our nation about Capitalism vs. Socialism, and about the ostensibly greater efficiencies achieved in having the private sector do stuff vs. the government doing that same stuff.  I should first note that the TeaBaggers and others of that ilk, who keep yelling that Obama is a Socialist really need to get a grip. I assume they keep yelling stuff like that because, well they’re just not very smart.  Most of them don’t really know what Socialism is in any meaningful sense.  Socialism basically means that the “means of production” are centrally owned, i.e., by a central government.  In only a very few countries has socialism been tried in a pure sense, e.g. the Soviet State and a few others of that ilk. Generally, they have not been notably successful. A lot of the problems seem to stem from that old Russian adage, “we pretend to work, and they pretend to pay us.”

In India, a mixed economic system operated. That is, India employed a “public sector” in which the government owned the plants—generally this sector had the heavy industrials within it. They had a private sector, in which the companies were privately owned, and they also had a mixed sector, in which both types of ownership existed. A number of European nations use a modified socialist model in which many types of services are government owned and operated, but the majority of commercial products and services remain private.
In the United States, we clearly use this mixed model, since  much of our infrastructure, e.g., our highways, have been built by the government, some of our health care is financed by the government, much of our education is financed by the government, and many other services are government financed, or run.  But the vast majority of economic activity in this country is privately owned and operated. Given that Obama has not made any effort to dismantle that system, it is at best inane to label him a socialist.  
In economic systems, we often employ two concepts to assess how well we are doing. One is “efficiency” and the other is “effectiveness”.  Efficiency refers to the input-output ratio, or unit cost. We measure how much labor and material cost we employ to produce a unit of output, and then we can use that measure to compare like economic entities on their relative efficiency.  We need always to be careful when employing such comparative measures to be comparing like output products. That is, we should not compare the unit cost of production of, say a Mercedes Benz sedan, with a Chrysler PT Cruiser. One is clearly a luxury vehicle, the other an annoying little knockoff of a 1939 auto design. We could of course compare two Mercedes plants, or even two plants producing PT Cruisers and measure their relative efficiency.  The Republican advocates of capitalism argue that the private sector is invariably more efficient than the public sector at doing really anything. Yet, in a number of cases, for example, health insurance, the public sector in the form of Medicare can be seen to operate at a lower cost, i.e., at a greater level of efficiency. Mainly the difference here seems to be in the form of relatively lower overhead in Medicare, because the upper levels of private insurance providers pay exorbitant salaries and bonuses to their executives relative to the government.
We can also see cost disadvantages in other forms of “privatization” of formerly government services, e.g., the military. When Shrub and his gang “privatized” parts of our military by giving very large contracts to firms such as Blackwater and Halliburton, the overall cost of providing the services increased dramatically over what they would have been if run by the government itself.  Again, the relative salary structures explain the differences.  So, although it remains arguably true that the private sector may well be more efficient at producing many types of goods and services than the government, it is not axiomatic.
The second type of measure is effectiveness. By “effectiveness” is meant the relative achievement of the main purpose of an activity.  For example, an immunization program might be measured on the extent to which it limits or eliminates the incidence and prevalence of specific diseases, e.g. measles.  Measures of effectiveness are not always so relatively straightforward, because the presumed cause and effect relationships are not always so clear.  In education, for example, the “No Child Left behind” program  has been translated into an increasingly simplistic model in which teachers are viewed as the sole determinant of our children’s education achievement as measured by standardized achievement tests.  The entire program is aimed at test gains, and so the educational system itself is slowly being redesigned into a model in which we teach kids how to take the standardized tests.  There are many obvious things wrong with such an enterprise. First, “education” should be as much about critical thinking skills as test-taking skills, but our current approach largely ignores this issue.  Second, our teachers are but one element in the learning process. Kids’ status on entering school, their home environment, their parental interest and oversight, are all equal factors in determining how well and how much kids actually learn. Teacher skills are but one factor.
On effectiveness measurement, because we have become intellectually lazy, we mostly choose not to do the hard work of forging usable and theoretically defensible measures. We tend toward the lowest possible denominator, often electing to measure that which is easily measurable rather than that which is important.
In many private enterprises, we used to compete on two bases, efficiency and effectiveness.  Efficiency is relatively straightforward—unit cost.  Effectiveness would be more complex and used to include the functional performance of the item, as well as its reliability over time, i.e., its “quality”. For example, my McIntosh stereo system (made in New York and not related to Apple-crap) that I purchased in 1968 still produces superb music  and has experienced no “hiccups” over its 40+ years of performance.  Compare that system with most of today’s electronics which are dead within three years.
It would be interesting to compare relative effectiveness of services produced both by the private sector and the public sector. For example, we could compare the provision of services by Blackwater as against similar services by the US military. Many would argue that, not only is Blackwater (now Xe) more expensive, i.e., less efficient, but that they are less effective at what they do—ergo, it would be better overall were the US military (the Government) to provide these services directly.
Over time, I would argue that the private sector has changed the nature of its game dramatically in terms of efficiency and effectiveness. Beginning in the early part of the 20th century, one could see the private sector, in pursuit of efficiency gains, trying to reduce its unit cost of production so as to become more efficient and, therefore, more competitive. Thus we saw a shift in production from the North to the South because of the low labor cost in the South.  That shift never really stopped as our business executives, always in pursuit of higher profits kept moving the locus of production in the direction of lower labor costs, eventually moving their enterprise production plants to other countries.  Over time, less and less of our commercial production of goods and services is carried out within the United States—which explains in part our unemployment dilemma.  If we do not produce anything here, why would we need a labor force?  When, for example, housing collapsed, that was the last bastion of employment, leading to the continued high unemployment rates, despite the theoretic end of the recession.  There are no jobs because our productive capacity has been moved out of the country in order to gain low unit costs of production.
I would also argue that over the last 20-30 years, not only has our executive workforce been focused on efficiency, it has largely eliminated the other measure—effectiveness. In pursuit of greater profits, efficiency has replaced all other measures. Seemingly, we no longer compete on quality.
Now, if that be true, I am wondering whether we still have one more shift needed in pursuit of greater efficiency.  Why not begin “offshoring” our executive class? Since they represent the last really large pool of cost to reduce, we should think about ridding our companies of that executive staffing and moving those functions to India, China, et al. Think of the savings we could achieve and think of how happy that would make our stockholders.  We could shift all boards of directors, all senior executives—say the top three tiers of every US Company. Wouldn’t that be great?
Another great example of “Be Careful What You Wish For, Guys.”
Just thinking . . .
Post a Comment