The magic solution Rachel from Accounts is looking for - markets

We’re told, by the Number Two, that there’s going to be a big crackdown upon waste:

I will not accept this consensus. Of course, to grip waste there will be no one silver bullet. If it was easy, the Conservatives would have achieved it. This will take hard work, difficult decisions, and a ground-up approach which interrogates every single line of government spending. That’s the difference between this Government and the last – we will roll our sleeves up, do the hard work, and make the tough choices.

It is true that our own analysis is that government does too many things - among them stopping anyone else from doing anything - and that the solution is simply for government to do less. That’s not in accord with the current zeitgeist of course.

So, let us take this claim seriously. Government contains waste which needs to be rooted out. Do the same things but more efficiently. OK.

We’re told that in mathematics a useful technique is not, in fact, to solve the problem in front of one. Instead, convert it to one where the solution is already known and thus QED.

OK. Waste is the inefficient use of resources. We are using £100 of resources to achieve the desired goal when, in fact, it would be possible to reach that same end point with £90 of resources (or, with government, £10). The £10 (or £90) is thus waste to be excised.

We can convert this problem to low productivity. More specifically, to low total factor productivity. Not much of a conversion because they are, in fact, the same thing. Using £100 where we could use £90 (or £10) is being less productive in our use of resources than using the lower number to gain that same goal.

We have thus converted our description but not the thing. Government waste is low tfp in those areas of the economy done, those activities undertaken, by government.

Low total factor productivity is a problem we know how to solve. As Paul Krugman once pointed out by one estimate the Soviet Union - using politics, planning and central control - managed to improve tfp by not one single iota, percentage point or smudge in its entire 70 year existence. As he quotes Bob Solow, the market economies gained, over the same period, 80% of their growth from this more efficient use of resources - less waste.

We can approach the same point via Will Baumol’s work. Government can indeed invent stuff but innovation is near entirely beyond it. It is innovation that improves tfp and that’s the thing that markets are wildly better at.

We have converted our waste problem into a tfp problem. We know that markets improve tfp in a way that governments do not. Thus the recipe for the reduction of waste is to do more things by markets.

Which is the solution that Darren and Rachel are looking for. More markets.

Now of course that is the answer you would expect us to come to near whatever the original question. But the fun thing here is that however unfashionable this is as a political idea currently it does have the wondrous quality of being correct.

It is markets that improve efficiency. We wish to improve the efficiency of government. Therefore we must use more markets in governance. QED.

Tim Worstall