The role of markets in delivering public services

Markets match people who provide goods and services with those who need them. But they can also lead to unfairness and inequality.

I love my town’s local market. It brings together producers of food, drink and craft from the surrounding area and allows me to purchase things that I might not otherwise have stumbled upon.

I also like the stock market. It allows me to invest (primarily via low-cost index funds, of which I’m likewise a fan) in companies around the world, so that I can support their activities and share in their commercial and financial success.

But just because I like these two specific markets does not mean that I like all markets. And when it comes to the delivery of essential public services, I’m going to take some convincing that markets are a good idea at all.

The public and the private realm

Thinking about the delivery of goods and services more broadly, I see two main ‘realms’.

Firstly, we’ve got the public realm. Where public goods and services are provided by the state (or via partners under some kind of outsourcing arrangement) and are paid for via taxation. Things like schools, hospitals, roads, national defence, environmental protection and such like.

Secondly, we’ve got the private realm. Where we engage with commercial providers to supply us with goods and services that we don’t regard as ‘public’ as such. Things like food, clothes, electricity, somewhere to live, a car to drive, streaming services to watch, etc.

The distinction between these two realms is already somewhat problematic, because a lot of things in the ‘private’ realm are actually fairly essential to our daily lives. Stuff like food and water, for example. (Though perhaps not Netflix.)

Indeed, the idea of what falls into the definition of the public versus the private realm is, in many cases, really quite arbitrary and a legacy of political, historical, geographical and other factors.

That’s one grey area. But there’s another one, too. And that’s the realm of ostensibly public services that are delivered not by the state and funded through taxation, but delivered (and sometimes funded, too) via a market-like mechanism.

And it’s on this grey area that I’d like to focus.

Markets as a mechanism for exchange

To start at the beginning, then, what’s a market? As we saw in the intro at the top of this newsletter, a market is essentially a mechanism for bringing together buyers and sellers of goods and services. Whether that’s honey, Tesla shares or something else.

We generally use money as the medium of exchange in markets. Because bartering, which seems to have been what we used in times before money, wasn’t hugely efficient.

You might have a pot of honey, for example. And I have a spear that I’ve just made. I want your honey, but you don’t want my spear. So I’ve got to first trade my spear with someone who has something that you want, before I can then trade that for your honey.

(I could, of course, just poke you with my spear and take your honey. But that’s not really how markets are supposed to work. Even if it sometimes feels as if that’s exactly how they do work in practice.)

But if I can sell my spear for money, and then use (some of) that money to buy your pot of honey, then everyone’s day just got a whole lot easier.

The (optimistic) theory of efficient markets

In theory, markets are efficient. They bring together rational and well-informed buyers and sellers, who agree on the optimum price for whatever they’re buying or selling.

In practice, however, not so much.

Because, let’s be honest, people don’t always act rationally. We probably all know someone who’s bought shares in a company simply because they like the name or the logo. Or who bought a kitchen appliance because of who was in the TV advert.

People buying in a market also don’t always have very good information about the options available. So they’re not really able to make an informed decision about what good or service, from the many options available, is best for them.

As far as I can see, the only place you’ll find an efficient market is in an economics textbook.

Markets and money

Nevertheless, markets can work well.

But they’re not always the best way of connecting providers of goods and services with those who wish to receive those goods and services.

And this is down to money, the market’s preferred medium of exchange. Because in the market, our ability to procure a good or services is linked inextricably to our ability to pay for it. No money, no good or service.

I had planned initially to write at this point that, here in the UK at least, we don’t have any obvious instances of a ‘pure’ market for essential public services. Except we do. Supermarkets, for instance. If you don’t have the money, you can’t buy food. Which is why we (regrettably and to my ongoing frustration) have – and need – foodbanks.

But we don’t regard food as a public service, so we don’t see supermarkets (as just one example) in the same way as we would, say, the market for healthcare in the United States.

Quasi-markets and public services

What we do have, however, is a series of quasi-market mechanisms for the delivery of public services.

Our utilities (water, electricity, etc.) operate in a market-like manner, subject to price caps (in some cases) and lower social tariffs. But many of them seem to be fairly dysfunctional and plagued by under-investment. Just look at Thames Water, for example.

The NHS has its own internal market between commissioners and providers. It is possible that this approach improves cost effectiveness, as some people claim, but it almost certainly causes a whole lot of hassle along the way.

And our universities operate an odd kind of market, where students compete for places but, once they’re in, pay a regulated fee that is financed initially by the government (via the student loan system) and then sees students graduating with a frankly insane amount of debt.

Parallel markets for people who can pay

We also have a growing range of ‘parallel’ markets.

Private schools attract wealthy parents who, for one reason or another, are not satisfied with the state school system. People with money can opt for private healthcare that bypasses (or, in some cases, piggy-backs on) the NHS.

And anyone who wants to head north past Birmingham can shell out a tenner (£10.30 for a car, to be precise) for the M6 toll, rather than slumming it on the regular motorway.

So how long might it be before we get, for example, private police services to patrol our neighbourhoods. Or a swanky exclusive road network for the well-heeled. Or premium upgrades to existing public services. Speedy boarding at your GP surgery, perhaps. Or on the transplant list.

Why I’m wary of markets

I worry about this kind of thing because it brings us to our fundamental questions in political philosophy of (a) who gets what and (b) who decides.

Markets, after all, provide goods and services to those who are able (and willing) to pay for them. So are markets a fair way of distributing public services? And should entitlement to such services be based on an individual’s ability to pay?

In my view, public services should be distributed on the basis of need. Not on the basis of ability to pay. Nobody should be denied public services because they cannot afford to pay for them.

Otherwise they’re not really public services. They’re just regular services. Stuff we want but don’t necessarily need.

(As you can probably tell, I regard the public nature of a service as being intrinsic to the service itself, rather than a being a function of how it is delivered. But getting into that in more detail will have to wait for another issue of the newsletter.)

And isn’t there a qualitative difference between a functioning circulatory system, for example, and the latest iPhone?

And why you should be, too

You could possibly argue that I’m being somewhat melodramatic here and that we’re not yet in this situation. And I would possibly disagree.

But what I know for certain is that, as we push for ever greater efficiency and cost-effectiveness in the delivery of public services, the push for greater use of market mechanisms will increase.

In some circumstances, of course, such mechanisms might work well.

But in others they most certainly will not.

We need to recognise the limitations of markets. To recognise that they are not – and should not be – the default answer. Or anywhere near the top of the list of possible answers.

And we need to be vigilant against their misuse.