Public and Private Incentive

by Elaine Schwartz    •    May 18, 2010    •    588 Views

For centuries, the US Postal Service delivered most of the mail. The job it did was satisfactory but not optimal. Yes, through sleet and snow, etc., we received our letters and packages but employees rarely focused on cutting costs and innovating. Two results? The USPS loses money each year and entrepreneurs create FedEx and UPS.

Concerned about government’s inefficiencies, economic historian, John Steel Gordon, provided some history. The problem, we soon see, is the wrong incentives. Save money? Your budget decreases. Innovate? People might lose jobs. However, the 19th century British Navy had a solution. Seamen who captured enemy vessels shared the loot. A 21st century version could let bureaucrats share contemporary plunder. According to Gordon, any public employee who devised a cost saving initiative would receive some of the money saved or a financial regulator who uncovered massive fraud could receive a reward.

My concern takes me back to incentives. In the former Soviet Union, no one ever figured out how to stimulate efficiency and productivity through government selected incentives. When people knew they would be rewarded for increasing production in a lamp factory, they produced lighter lamps. When the quota was weight, each lamp became heavier. All too frequently, bureaucratic incentives become perverse incentives that have unexpected consequences.

The Economic lesson

Adam Smith, in 1776, suggested that we are such a diverse population that no government individual could possibly know what is best for each of us. For that reason, he preferred the market and individual initiative as the source of a just and fair society. With 21st century government burgeoning, is it possible to create the incentives that would optimize its performance?

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