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.