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 1, 2009 | Go to article overview

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


1. INTRODUCTION

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.

I am of course not arguing that public policy and governance can be improved by a significant increase in inefficiency, in the sense of indiscriminate waste and corruption. Rather, I seek to discriminate between different sorts of waste (as the opposite of efficiency). I shall distinguish between 'bad waste' due to rent-seeking and 'good waste' as the cost of experimentation. I shall then argue that the much vaunted aspiration toward universal efficiency in the public sector has indeed successfully eliminated much 'bad waste', but at the price of also eliminating much 'good waste' as well. And in doing so, it has constricted innovation. I shall seek to explain the logic of how this situation has arisen, why it is a problem, and what might be done to remedy it.

2. GOVERNMENT IS A SERVICE

Our starting point is that government (and governance in general) is a service. It provides services of defence, law and order, transport and communications infrastructure, health services, education services, social services, regulatory services, and so on. …

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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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