Saturday, September 15, 2012

Mysteries of bloat

To explain to us all what's going on with the Chicago teacher strike, David Brooks has come up with a totally new basic economic theory!

In place of the conventional Samuelson model of consumption goods

excludable non-excludable
rivalrous private goods
(cars, shoes)
common goods
(forests, fish)
non-rivalrous club goods
(movies, golf)
public goods
(water, knowledge)

he has devised one that is an order of magnitude more efficient, that looks something like this:

Economy I Economy II
tradable sector bloatable sector

Whereas the conventional model looks at the world of goods from the demand side, the narrow and selfish standpoint of the consumer, the new model is from the supply side, that of producers, job creators, people who make a difference, so it's much more important and serious.
Economy I is the tradable sector. This includes companies that make goods like planes, steel and pharmaceuticals. These companies face intense global competition and are compelled to constantly innovate and streamline. They’ve spent the last few decades figuring out ways to make more products with fewer workers.
Economy II is made up of organizations that do not face such intense global competition. They often fall into government-dominated sectors like health care, education, prisons and homeland security. People in this economy believe in innovation, but they don’t have the sword of Damocles hanging over them so they don’t pursue unpleasant streamlining as rigorously. As a result, Economy II institutions tend to get bloated and inefficient as time goes by. 
Naturally getting things from Economy I is good for consumers, who benefit from that intense global competition when it lowers the prices you have to pay for stuff; you will have noticed how much cheaper airplanes and prescription drugs have become in recent years. Or maybe you haven't noticed, if your insurance plan pays for the meds, but it's probably true.
Pencil draw graph image by Anatoly Tiplyashin from The source, "How to make a Pareto graph", explains that "A Pareto chart is used to graphically illustrate a complex set of data. It is based on the Pareto Principle, which says that 80 percent of the effects come from 20 percent of the causes."
By the same token, when your Economy II stuff starts getting bloated, the best thing you can do is start getting it produced in a more Economy I kind of way. Prisons, for example, used to be ridiculously luxurious institutions, like cruise ships, with as much as a one-to-one ratio of staff to customers and who knows what kinds of on-board facilities: gyms, celebrity lectures, single rooms for those who don't care to socialize so much, etc.

This bloat has been remedied by the introduction of market forces in the form of privately run for-profit prisons; the competition inspires them to cut costs drastically, making every penitentiary a taut, profitable hell-hole. Of course your government won't see any of the resulting cash, but it'll be in the hands where it can do the most good, those of job creators.

The same kind of thing holds for public schools, as in Chicago, horrible places pullulating with children and overpaid teachers earning nearly as much as a  management consulting consultant for Accenture, whatever that is; compare that to the quiet, refined atmosphere of a typical private school, with its small classes and friendly non-union teachers. They'd better be, you say, at tuition fees of $40,000 a year, but that's not the point.

In traditional economics, it's hard to see how you could make a public school (public goods) more like a private school (club goods) without charging tuition. Brooksian economics explains it with the simple and elegant Sword of Damocles principle: keep your workers in a permanent state of fear. This is bound to make them as innovative as you could want.
Charter Schools under the Microscope. By Nathan Golub for IndyWeek.

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