Nation-As-Small-Org Bias

Imagine you had a small business or non-profit with various roles to fill. You might, for example, need an accountant, lawyer, gardener, custodian, cook, driver, and a receptionist. When you filled these roles, you would make two key choices:

  • Who they are – In addition to judging intelligence and competence, you’d also judge their trustworthiness and loyalty to you and your organization. In roles where mistakes are expensive, you’ll want folks to be extra reliable. And in roles where betrayal is costly, you’ll want folks to be extra loyal. If you expect to have accounting “irregularities”, for example, you might want to make sure your accountant is a family member.
  • How they relate – You’ll decide what incentives to give each person and role. You might contract each time with the lowest bidder, choose a supplier with a good reputation but be ready to switch easily, develop a long term supplier relation, hire someone paid via piecework or commission, or hire an employee paid via performance reviews and the hope of promotion. In especially sensitive positions you might hire family members, to pull in stronger family incentives.

Now consider the issue of which industries are nationalized vs. private, and if private how heavily regulated. For example, music is usually private with little regulation, food is private with modest regulation, while medicine is either heavily regulated or provided by government employees. Warriors are mostly government employees, while war machinery comes from private but heavily regulated firms. Teachers are mostly direct government employees. Government employees are rarely paid on commission; they almost always get a straight salary with strong job security.

A great many clever arguments have been offered over the years to explain why various industries should be nationalized or heavily regulated, and why government employees should have such weak incentives. But overall such explanations seem to me to rather weak; they leave a lot of unexplained variation. So I’m tempted to consider a simpler story: perhaps the public unconsciously compares national industries to the personal roles in a small organization.

That is, if security was essential to your small organization, and security folks might need to risk their lives sometimes, you’d want them to be very loyal employees. So we want national warriors to be very loyal. If you’d insist on treating a live-in nanny “like family”, you might want the nation’s teachers to be government employees with job security. If you’d want a personal doctor committed to ethical norms of careful care, you might want your nation to regulate the medical profession into supporting such norms. And if you don’t mind buying your computers from strangers, maybe you think it ok if the computer industry is mostly private.

Of course this analogy has some validity; there are some correlations between personal roles in a small org and industrial roles of a nation. But alas, the correlation is weak; how best to manage a national industry can really be quite different from how best to fill a small organization role. So I fear that a public primed to assume we should treat these similarly leads to a rather inefficient selection of which industries are nationalized and heavily regulated.  Count this as yet another cost of democracy.

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  • But the fact is that government officials generally used to be paid on commission. For example, until the 18th century, English civil servants typically had the right to charge fees for doing their work, and this was true in bureaucracies the world over. This enabled the state to pay less in salaries and defray the cost of hiring onto the users, a hidden (and thus less unpopular) taxation. However, this caused an obvious conflict of interest, because it made the civil servants effectively the employees of whoever wanted the documents processed, rather than the state. The removal of commission payments and switch to pure salaries is one of the key things you see in the centralisation of state power that went on across Europe from roughly 1700 to 1900. Of course there are still countries where many civil servants effectively work on commission – i.e. their real pay is the bribes they receive. It does not seem to me like this is a good thing.

    Public sector workers get such good job security because they are on both sides of the negotiating table. They elect their union reps, but they also elect the politicians who negotiate with the union reps.

  • Robert Koslover

    Interestingly, you speak as if the present division of jobs/industries (among private vs public and unregulated vs regulated) was specifically and freely chosen to be that way by the overall public. I question that assumption. It seems to me that a very large amount of the aforementioned distribution has actually been chosen/enforced by unelected government bureaucrats. And only to the extent that those bureaucrats’ actions truly enrage the public, does the public ultimately succeed in forcing them to comply with the public will.

  • In Singapore, public employees get a bonus pegged to GDP growth,

    As to your broader point, I suspect that two factors play a role, similar to what has previously been pointed out:

    1. The intellectual elite’s fantasy of deliberative democracy, in which government’s actions are supposed to be the result of the public’s deliberation on the public good, as if it were a household or small org. prevents people from being aware of the self-serving reality of the situation. This is the premise of all “civics” education, and most high school government classes. We are all indoctrinated to believe that this is what democratic governance is about, a Vermont town meeting writ large.

    2. The reality of public employee interest groups taking advantage of public ignorance whenever and however they can (i.e., lots).

    This is another way of expressing the two previous comments,

    “Public sector workers get such good job security because they are on both sides of the negotiating table. They elect their union reps, but they also elect the politicians who negotiate with the union reps.”

    and similarly,

    “It seems to me that a very large amount of the aforementioned distribution has actually been chosen/enforced by unelected government bureaucrats.”

    Curiously Singapore, which more closely resembles a small org. than does the U.S. gov, and more closely resembles a family insofar as Lee Kuan Yew almost has the powers of the patriarch, they DO have a government like a business, performance bonuses and all.

  • What industries do you think we leave insufficiently nationalized/regulated because we think it an appropriate responsibility for strangers?

    • Buck Farmer

      Based on Robin’s previous posts I’m going to wager on…

      …mating and sexual access markets?

  • Buck Farmer

    I’d say this isn’t a cost of democracy, but a cost of any large scale organization of humans.

    Look at large corporations…often there are opportunities to use internal markets (such as prediction markets) or decentralization to increase efficiency, improve decision-making, and ultimately better serve their clientele.

    However, most functions that are seen as either essential or very important are heavily centralized, top-down hierarchically organized. Why is this?

    1. Presents the illusion of control. Executives want to believe they are in control of what is important, just as the public wants to believe the government can “fix the problem” through direct action/legislation.

    2. Presents the illusion of information. Extracting information from decentralized or market-based organizations requires significant footwork at the top as well as being rife with interpretive ambiguity. In a top-down hierarchy an executive can command his subordinates to provide him with an answer to a specific question. The answer will be tailored to his question (and even his personality) thus obviating the work for him, even if the answer is less accurate or misleading compared to what a market would give.

    • very insightful. You should blog or link to your blog.

    • Koch Industries is supposed to follow something called “market-based management” in the internals of their company. I don’t know much about the specifics though.

      A lot of people talked about Elinor Ostrom after she won the econ nobel (understandably the case for Pete Boettke since he’d just written a book about her Bloomington school), it would have been nice to hear more about Oliver Williamson who discussed the distinction between case-by-case bargaining and relationships solidified by contract.

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  • bcg

    This post was delightfully fascinating!

  • michael vassar

    It’s not obvious to me that any other comparably simple heuristic would do a *better* job than this one, so complaining about it seems silly to me. Whatever decisions people make, whether in government or business, will generally be guided by simple and fairly transparent heuristics, especially as size increases and the need for simple standards of scrutiny increases with it.

  • What I cannot figure out is why with so much public or highly regulated there are privately run prisons. Why is energy so highly regulated?

  • Mal

    There are two distinct reasons why some industries are public and some are private: (1) simple management efficiency and (2) ends versus means.

    For repetitive tasks, carrots and sticks work just fine. Governments as customers often want to “buy” war. Now war machinery is privately supplied, for it can be built on an assembly line. But war itself (especially modern war) is extremely creative. As everyone knows, no battle plan survives the opening salvo. And a different incentive is required for creative tasks. The incentive that works best, is a higher purpose. If you look at the dichotomy between creative and mechanical jobs, you’ll see that it just makes sense for a governmental-customer to buy the first set of goods from public servants and the second set from private sellers.

    A second reason, is that for some services only the end product matters (e.g., does the computer work or not), while for other services the means are equally critical (e.g., it is not acceptable for teachers to achieve high test scores by torturing the children). From a management perspective, the government-as-customer purchases products from private suppliers when it doesn’t care how it was made – when the only thing that matters is the end. But when the means are equally important (think of the huge placebo effect we get knowing that drugs are FDA approved, or that doctors are licensed), then the suppliers are either public or highly regulated.

    So don’t think of the government as a small company. Think of the government as a smart customer. The customer is going carefully choose suppliers based on two things: (1) is the product a creative good or a commodified good, and (2) is the end product the only concern, or do the means matter as well. Based on the answers to those questions, the choice of public v. private is pretty straightforward.

  • Well, yeah, I do want the people running, say, the Strategic Air Command to view it as a position of duty, honor, and trust rather than as a profit-making opportunity.