Thursday, 22 January 2015

Profit Needn't Be A Dirty Word, And When It Comes To Your Money It Usually Isn't

It's quite a common view that when profit enters the public sector through market forces there are reasonable grounds for complaint, as wonderful State-run organisations give way to cold, hard, money-oriented capitalism, and efficient service provision gives way to profit motives. But as anyone with even the sketchiest understanding of economics and moderate familiarity with post-WWII British history would know, this is misjudged. Admittedly this misjudgement is ubiquitous, but its ubiquity should not blind people to its foolishness.

All services need two things to function - they need capital to pay for the material goods, and they need labour in the shape of a paid workforce. The money for this can come from two places - it can either come from private investors, whose own money is at stake and whose interest is in overseeing a successful operation, or it can come from the government, whose money comes from taxpayers, and whose interest is always primarily in courting popularity and votes.

Already, it is obvious which of the two investors is most likely to have the efficacy of the organisation as top priority, and most likely to have carefully considered research to back this up. Profit, far from being a dirty word comparable to smelly bodily secretion in a room full of fresh food, is actually the primary signal as to whether an organisation is being run well.

Yes, of course the State-run health services, education, schools, roads, etc do not have to have profit as their overriding goal in order to provide a public service to the electorate. But for reasons that often slip by unnoticed, profit is the key ally in the measure of the service, because it acts as a barometer to measure overall efficiency. Efficiency is to an organisation as justice is to a court of law, it is the principal measure of whether the organisation is fit for purpose - and anyone who thinks that that varies according to whether the organisation is publicly or privately funded is thinking absurdly. 

Being in the public sector, as I am with my role in local government, I have to work as efficiently as possible in order to save the taxpayer money. But whereas a private company is underpinned by its goal of profit and good service, a State-funded organisation (like mine) is underpinned by its goal of savings and good service. What's being missed by people who dislike profit is that profits and savings are really two wings of the same golden eagle - they are exhibitions of efficiency and of prudent use of finances. Any profit that public sector organisations make is efficiency that benefits taxpayers.

Some people are under the impression that the service suffers when profit is the motive, but that's to overlook two things: firstly, delivering profit is delivering efficiency, which is part of the service we should desire; and secondly, if you eradicate profit motives from your organisation you lose sight of many of the signals for an efficient service. This is easy to see in the free market - businesses that see a diminution of quality in product or service will lose custom to better competition - and this is the biggest incentive for them to guard against complacency. Without similar signals in the public sector, the same thing happens, except where there is no competition to pick up lost custom, we see only profligacy, stagnation and lingering inefficiency.

In the free market, success is measured on whether the goods or services you provide are valued by the public more than the price they'd be charged to acquire them. Conversely, if goods or services are funded by taxpayers, there is much less pressure to provide something efficient and of value because those signals are lost in the continual flow of public money poured in. For that reason, efficiency of service and of resources is astronomically more likely to occur in the private sector, not the public sector.