The Innovation Deficit in Public Services: The Curious Problem of Too Much Efficiency and Not Enough Waste and Failure

By Potts, Jason | Innovation : Management, Policy & Practice, April 2009 | Go to article overview
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The Innovation Deficit in Public Services: The Curious Problem of Too Much Efficiency and Not Enough Waste and Failure

Potts, Jason, Innovation : Management, Policy & Practice


It has long been recognized that government and public sector services suffer an innovation deficit compared to private or market-based services. This paper argues that this can be explained as an unintended consequence of the concerted public sector drive toward the elimination of waste through efficiency, accountability and transparency. Yet in an evolving economy this can be a false efficiency, as it also eliminates the 'good waste' that is a necessary cost of experimentation. This results in a systematic trade-off in the public sector between the static efficiency of minimizing the misuse of public resources and the dynamic efficiency of experimentation. This is inherently biased against risk and uncertainty and, therein, explains why governments find service innovation so difficult. In the drive to eliminate static inefficiencies, many political systems have subsequently overshot and stifled policy innovation. I propose, instead, the 'Red Queen' solution of adaptive economic policy.

Keywords: public sector economics, economic evolution, innovation, innovation policy


The government or public sector of most nations typically accounts for between onequarter and one-half of all economic activity. Yet the criteria that we evaluate the effectiveness of such services is not automatic, as it is in private business enterprise due to the disciplining effect of the market, but must be imposed. Democratic mechanisms function to both reward and discipline political parties and thus to create incentives to improve public services. However, in the short run, the evaluation of the management and provision of public assets and services rely on criteria of efficiency.

There is a vast literature on the economics of government services, optimal policy, social and public choice theory and political economy that is based on a framework of instruments and targets, or mechanisms and goals, as evaluated in terms of efficiency. This is both in terms of the goal (e.g. Pareto efficiency for an allocative goal) and also the means by which it is achieved, such that some mechanisms may be more efficient than others in achieving the same goal (e.g. an income distribution target, or a target level of production of a service). It is thus a widely held axiom that public sector management of assets and provision of services is properly evaluated as effective when it is judged to be efficient. In consequence, improvements in the management of public assets and in the provision of public services are then implicitly defined as anything that renders these services more efficient (or less inefficient).

However, this evaluation criterion is only meaningfully defined with respect to assets and services that already exist. It excludes from the outset criteria that relate to the innovation of new services or even the elimination of services because the efficiency criterion is meaningless in such cases. This, in essence, is why innovation is difficult in the public sector. The goal of efficiency is inconsistent with the goal of innovation. Put differently, this is why one-half to three-quarters of the economy remains in the private sector where this inconsistency does not hold.

Now although considerations of economic efficiency do not of course entirely determine the nature and shape of all public policy and government actions - for these are also driven by political expediencies, citizen pressures and realpolitik - it remains a widely held axiom of both effective policy and good governance that to go strongly against considerations of economic efficiency makes for bad policy. This is easily witnessed in public demand for, and government accord with, the general sensibilities of transparency, accountability and efficiency in the conduct of government economic intervention in the drafting of regulation, the use of public money and the management of public assets. Yet I shall argue here against this seemingly sensible proposition by noting the implications of it going too far: indeed, I shall specifically argue the benefits of a reduction in efficiency.

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The Innovation Deficit in Public Services: The Curious Problem of Too Much Efficiency and Not Enough Waste and Failure


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