Why Do Government Enterprises Work So Well? By Bryan Caplan

When I was in high school, Murray Rothbard’s analysis of government ownership was a revelation. Why was my high school a den of waste, incompetence, and stagnation? Because it was a government enterprise!

On the free market, in short, the consumer is king, and any business firm that wants to make profits and avoid losses tries its best to serve the consumer as efficiently and at as low a cost as possible. In a government operation, in contrast, everything changes. Inherent in all government operation is a grave and fatal split between service and payment, between the providing of a service and the payment for receiving it. The government bureau does not get its income as does the private firm, from serving the consumer well or from consumer purchases of its products exceeding its costs of operation. No, the government bureau acquires its income from mulcting the long-suffering taxpayer. Its operations therefore become inefficient, and costs zoom, since government bureaus need not worry about losses or bankruptcy; they can make up their losses by additional extractions from the public till. Furthermore, the consumer, instead of being courted and wooed for his favor, becomes a mere annoyance to the government someone who is “wasting” the government’s scarce resources. In government operations, the consumer is treated like an unwelcome intruder, an interference in the quiet enjoyment by the bureaucrat of his steady income.

Twenty five years and a Ph.D. in economics later, Rothbard’s words still sound like a revelation. They handily explain everything wrong in government enterprises. There’s just one problem: Rothbard’s words explain far too much. Since graduating high school, I’ve seen a lot more government enterprises. I’ve paid more attention to the ones I already knew. And I’ve worked in a government enterprise for seventeen years. Their performance is almost always disappointing. But contrary to Rothbard’s story, their performance is rarely disastrous. The U.S. Post Office almost always delivers my letters in three days or less. One hurricane aside, I always have clean tap water for pennies a gallon. And most public school teachers put on a smile every morning and try to share some knowledge with their students.

What’s going on? Consider the following stories.

1. Rothbard mischaracterizes government employees’ incentives. Somewhat, but he’s not far off. In the public sector, the connection between pay and performance is truly weak. Public universities, for example, are satisfied with professors’ teaching as long as they demonstrate “high competence.” In plain English, that’s the top 95% of the distribution, or even the top 98%. Universities hold research to higher standards, but one lame article a year in A Refereed Journal usually suffices for tenure.

2. Elected politicians compete to make government work. There’s definitely something to this, but status quo bias is pervasive. Voters may throw politicians out if there’s a sudden decline in the performance of government enterprises. But voters yawn in the face of eternal mediocrity.

3. Government employees take pride in their work. In many parts of government, workers would feel bad about themselves if they fully exploited the system. This is obvious for teachers, most of whom clearly like children. But even most mailmen seem to care about doing a decent job.

4. Government employees care about their co-workers’ esteem. Government employees, like most human beings, don’t want people around them to hold them in contempt. As a result, a solid core of motivated government employees can use peer pressure to squeeze effort out of their careerist co-workers. Some professors, for example, love teaching – and therefore look down on professors who teach poorly. Fear of this down-looking impels conformist professors to do a better job.

Am I damning with faint praise? Sure. Even the best government enterprises are slow to cut costs. They’re bad at innovation. And they’re almost uniformly terrible at putting aside Social Desirability Bias to answer every enterprise’s most fundamental question: Is this worth doing at all? Yet the anomaly remains: Simple economics implies that government enterprises should be far worse than they really are.

Unfortunately, I doubt the economics profession will ever take this anomaly seriously. Left-leaning economists don’t want to grant the obvious case against government enterprise – and market-leaning economists would rather reiterate the obvious case against government enterprise than calmly test it against the facts.