A report on social services by the Productivity Commission raises serious problems about the quality of analysis in New Zealand.

There is a widely held perception that the Productivity Commission, which makes recommendations to the government on how to increase productivity, is neoliberal. Partly that is because the commission was set up at the instigation of ACT but that does not mean that its analysis is necessarily neoliberal. However, many of its recommendations seem neoliberal to some people. Explaining why illustrates some limitations of; economics, especially as it is taught and practised in New Zealand.

There is a basic economic model which says that competition in a market is a good thing – keeping down costs, encouraging innovation and responding effectively to consumer demand. Let me add a caveat, for what economics actually concludes is that ‘under certain circumstances competition is a good thing’.

I am not sure that the  ‘certain circumstances’ caveat is dealt with very thoroughly when economics is taught, while too  frequently it is overlooked in application. Even when they do not exist an analyst might conclude that competition is the best possible option of a not too attractive bunch. But for a good analyst it will be a carefully weighed judgement; others – frequently neoliberals – will ideologically leap to the conclusion that competition is always best or perhaps they don’t bother with or don’t know the caveats.

The Productivity Commission’s 412 page report More Effective Social Services is a part of the government’s push to introduce a ‘social investment’ perspective in social services, that is we should take into account that government spending can have long term consequences. Given that this perspective has long informed education and health policy, an extension to social services is not too radical. (It has not had much traction in the biggest social investment – our children.)

When the word ‘investment’ is used, many economists immediately equate it to private market investment. Despite the various caveats, they automatically assume that market solutions are often (usually) the best way of managing it (although they may require a number of government interventions, such as the RMA). Such economists conclude that the logic of social investment is to design the system to conform as closely to the market as possible. That seems to be the approach in the Productivity Commission’s report.

But the caveats are important. Before listing a few, I confess that I have not done a lot of work in the social services sector. Once upon a time an economist was expected to ‘crawl over ‘a sector before analysing it. I’ve probably done more crawling than the economists of the Commission. They cite a set of desultory case studies including that of Whanau Ora which, earlier this year, received an excoriating report by the Auditor-General for being over-expensive and not yet having demonstrated its effectiveness. (I have done a lot of work in the health sector, which I hope gives me some insights.)

Social services are an example of an economic activity which does not conform to the traditional market assumptions. In a conventional market transaction, the consumer of the commodity knows what they want and pays for it. That is a powerful incentive to align the economic decisions to give a socially satisfactory outcome. But that is not so common in the social services.

When a social worker knocks on your door you have only the vaguest idea what you want, if any, and the government is probably paying for the worker. It is not difficult to show, at least in the health system, that the alignments of responses are all wrong for a socially satisfactory outcome. The more you ignore them, the more expensive and less efficient your health system is; witness the American health system. The report does not even discuss this problem.

It gets even more bizarre when it discusses ‘equity’, that is, whether the outcome is fair. Much of economics deals with equity issues in one of two ways. It may assume that the income distribution is fair and so any market transactions are fair (a host of caveats to be added).

Or it ignores equity issues altogether arguing that economists do not have the skills to make equity judgments. That may be true but in principle we ought to assist people to make their own quality judgements. In fact there is a huge literature in economics on equity, but it does not appear to be conveyed in the New Zealand classroom. Certainly most economists duck when faced with an equity issue, but you wont be surprised that there is often an implicit one in their pronouncements – that the policy is in the advocate’s interest (or whomever is paying them). You will recall that neoliberal Rogernomics almost entirely ignored equity, switching the income and wealth distributions in favour of the Rogernomes.

Because the social service decision is not made by the recipient, the fairness of the income distribution is not particularly relevant (there are some other reasons). So the first draft of the report simply ignored equity even though it remains relevant. Three groups complained. (Good on them.)

The final draft has a bizarre two pages on ‘equity and an investment approach’ which said that ‘[s]ocial services are a form of merit good – something that people should be able to receive aside from their ability or willingness to pay’. Excuse me, but for an economist – a properly trained economist – a ‘merit good’ has a technical meaning and that ain’t it in this context. Even if it were, there needs to be an elaborate discussion to explain what is meant. If it had been explained, much of the underlying conceptual framework of the report’s investment approach would have begun to unravel.

Not surprisingly the rest of the section fails to explain how equity should (or could) be integrated into the social investment approach. The Commission was assuming that the income distribution was fair, the existence of social services says it is not; bit of a contradiction here?

My third example of the report’s weakness can be illustrated by Whanau Ora. I do not know enough about it to comment on it in detail but were I studying it I would be looking at the existence of transaction costs and transition costs. The report makes some desultory remarks about transaction costs – that is the cost of regulating each transaction. If you ignore these you can end up with solutions which favour contracting out. Had the Commission been crawling over the social services sector it would have been struck by what often seem high transaction costs in the contractual arrangements between governments and NGOs – they are always grumbling about them – and they would have tried to measure them. The Commission did not. Nor is there much on the transition costs of getting from delivery system one to delivery system two.

It seems possible that part of the failure of Rogernomics was because transaction and transition costs were so high. (In addition it is not evident that there was any improvement in outcome; sometimes there was a reduction.) In summary, like the Bourbons the report’s writers ‘have learned nothing and forgotten nothing’ from the shambles we call Rogernomics.

If you start off with a weak economic analysis you can easily end up with neoliberal policy conclusions. What I have set out here is quite orthodox and won’t surprised any properly trained economist. So this is not a rejection of economics; it is a rejection of economics as it is often taught and practised in New Zealand. One is reminded of the nineteenth century philosopher Hegel who said that to critique a theory you had first to get inside it, to know it better than its practitioners. Another way he put this was thesis, antithesis, synthesis.

Comments (14)

by Fentex on November 24, 2015

I became disillusioned with the study of economics at University and I've often characterised what drove me away as my lecturers mistaking their models for reality.

[...] a caveat, for what economics actually concludes is that ‘under certain circumstances competition is a good thing’.

I am not sure that the  ‘certain circumstances’ caveat is dealt with very thoroughly when economics is taught

And I've often had arguments where I feel people have been throwing around words such as 'marginal' a lot without actually considering how they are those caveats, that the reason the terms exist is to represent a considerable amount of valuation and consideration people encompass in their choices, but I see used as a sort of prayer to hold a place for an idea mostly discarded in debate and promotion of ideological certainty by people who only hew to a nugget of theory that suites their ambition.

Which speaks to another one of my great bug bears with a lot of argument on economic policy - the oft heard claims against incentives by people who don't recognise their own incentives to ignore what they dislike or failure to investigate what does not corroborate what they believe is expected of them.

by Rich on November 24, 2015

competition in a market is a good thing – keeping down costs

In most areas of commerce, competition intrinsically *increases* costs through duplication of production effort and costs of marketing and sales. The only justification for these increased costs is the need to set a fair price for a product and (in some but not all areas) offer a choice of "features".

For example, a competitive system for telecommunications requires two or more parallel sets of infrastructure to be built, at substantially greater expense. In other areas such as electricity, a pseudo-market has been created by government intervention that allows many companies to operate selling exactly the same commodity from the same generators over common infrastructure, and differentiation through creative confusion.

David Graeber analyses this privately operated, government facilitated bureaucracy in his recent book The Utopia Of Rules, which I'd heartily recommend.



by Draco T Bastard on November 24, 2015
Draco T Bastard

There is a basic economic model which says that competition in a market is a good thing – keeping down costs, encouraging innovation and responding effectively to consumer demand.

When what it actually does is kinda keeps profits down while costing more due to the increase in bureaucracy and duplicated buildings and machinery.

Competition can still be a Good Thing. Looking at multiple ideas to find the best solution to a problem is good idea. Having multiple organisations then implement their versions of that idea isn't as it's creating huge and unnecessary duplication (and probably not implementing the solution well).

Basically, lots of R&D and then monopoly production of that solution.


by Ross on November 25, 2015

the shambles we call Rogernomics

Brian, would you care to elaborate on what you mean by this comment. What was (and is) shambolic about Rogernomics?


by Murray Grimwood on November 25, 2015
Murray Grimwood

The whole 'economics' discussion is based on a temporary premise.

We hoed into a planet full of resources, and invented a trading proxy. Unsurprisingly, the system evolved to fit a growth scenario. That's what you get when you start small.

The problem comes at peak-extraction - applies jointly and severally - beyond which a growth-based system will be in trouble.(Oil is the linchpin resource and the Laws of Thermodynamics override all fiscal theories.)

Worse, if the system included forward betting (loans, debt, mortgages, investment, hedging, insurance) that 'tomorrow' was always going to deliver 'more', then increasingly those bets would fail to be underwritten.

And at some point, the system would have to adapt to de-growth, or collapse.

Social services are the supply of processed resources to the disenfranchised. Food, shelter, clothing, water, energy. If those are in increasing contention, giving 'money' won't help. While things stay coherent, this is a bidding-war in a scarcity scenario. If those folk are still the ones holding the least chips (even if you give them some extra) then they'll still be out-bid.

Neo-liberals will be of two kinds: those who know they're projecting a false narrative for their own advantage, and those who seriously believe in endless growth on a finite planet. There will be some conscience-salving, denial and avoidance in there too.

Post=peak, we could have expected a 'productivity' push; it's essentially a forced push into 'efficiencies'. They are essential to buy transition-time, but cannot outpace depletion, by an ever-increasing margin.

So the Commission is temporary, will fail in attaining its overall objective(s) and that failure will likely preceed - or be overtaken by - global events.

They in turn, can only take three forms; War(s) over what's left; Collapse (fiscal, trading, population); or a controlled population/consumption/pollution descent to long-term sustainable levels.  Fat chance of the latter!

The neo-libs may prosper (relatively) in the first, lose their heads in the second, and will presumably resist the third.

Meantime the goals - from the Left too - are growth, GDP, piles of 'money'. Swapping the family cow for five magic beans. That. too, was a fairy tale.....

by Brian Easton on November 25, 2015
Brian Easton

An early note. The standard theory of market competition and industrial structure derives not just from theory but also from economists having crawled over a wide range of industries and markets. The basic conclusion is that there is no single structure which works robustly for all of them. 

by Murray Grimwood on November 25, 2015
Murray Grimwood

Doesn't matter. Their 'crawling' is always an analysis of activity to-date, and a projection forward. Sometimes with other-parameter overlays, sometimes not.

But any system which deals with debt by 'inflating it away', and hides from realities by calling them 'externalities', is essentially counting deckchairs without asking why they're sliding past.

The standard spiel re scarcity goes that at some price-point, an alternative will appear. That may fool those who wish to be fooled, into thinking things can go on forever. No price-point, however, accounts for ultimate scarcity, and if the current price of energy is any indication we can't guarantee a clear signal nor that we'll get clear interpretations of same when/if they appear.

by Fentex on November 25, 2015

No price-point, however, accounts for ultimate scarcity

What can? If you fear the ultimate exhaustion of resources I don't see many alternatives but enforced poverty - no matter how efficient any alternative ultimate is still ultimate and to avoid it requires never exploiting resources.

Which is death.

Bitching about resources being used up and how capitalism (or whatever ism) can't stop that isn't really much use to anyone who wishes to live. Most people would rather better their situation, increase the odds for their children and wouldn't mind having the best path to that offered them but realise the perfect is impossible.

People trying to discern the best path include students of economics, which Brian argues for being better educated on the topic precisely because he fears the details of best theories are over-looked (if I understand him).

So competition is a pain and doesn't prevent us from all unpleasant consequences, is there a, er, competing theory that does a better job of mediating our unavoidable group desire and common wealth Murray Grimwood can advance?

by Murray Grimwood on November 26, 2015
Murray Grimwood

Ah, the old 'shoot the messenger so we can avoid the message' trick.

Actually, it's easy. Two simple things. You recycle finite resources at 100%, or leave them alone if that cannot be done. You fully mitigate, real-time, your impacts (residues, pollution, degradation, draw-down.

So you need altruism, population capped (bad pun).

No, we've never gone there, we don't show any signs of going there, and we're grossly overshot now, entering the last 'doubling-time' (actuallym the last one is more like an 'equalling-time') possible.

But arguing for the fatally-flawed, just because it suits you, is stupid to the point of pointless. :)



by Fentex on November 26, 2015

You recycle finite resources at 100%, or leave them alone if that cannot be done

That seems a dichotomy disconnected from reality with neither option likely to occur.

by Murray Grimwood on November 27, 2015
Murray Grimwood

That's what I said.

Just because something isn't going to happen, doesn't mean it isn't the correct move.

No more than emotions alter fact.

Despite many seeming to think they can.


by Brian Easton on December 01, 2015
Brian Easton

Regrettably, Fentex, that recycling involves energy, so that resource will be depleted in t any recycling exercise. Economics is based on the laws of thermodynamics, I am afraid. 

by Murray Grimwood on December 02, 2015
Murray Grimwood

Not quite, Brian.


If the resource is extracted, processed, delivered and recycled using 100% renewables (and they in turn are from renewably-produced technology/plant) then you can theoretically do it forever.

The dividing-line is when the finite resource is fossil carbon, and you are burning it to access the stored energy; then you are just using it up. The trick now is to use the remaining fossil feedstock to establish a renewably-based 'economy'.

But you're right, generally speaking. Ecomonics is based on thermodynamics, and the rules around entropy tend to override......

by Brian Easton on December 07, 2015
Brian Easton

One can always avoid the laws of thermodynamic by ignoring that a subsystem is not a part of the universe.

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