News > Business tips > Policy Radar: A sober critique of ‘public goods’

It is generally accepted the world over that certain goods, so-called public goods, can only be supplied by the public sector with governments at the helm. The thinking is that, for particular reasons, things like water, electricity, roads, courts, education and defence can only be supplied satisfactorily by governments.

The market economy, or so economists in the public goods school would argue, would produce too few of these goods and services. That is why governments need to step into the breach with taxation and develop public infrastructure with said tax money.

The South Africa’s dispensation clearly bought into this type of thinking. The South African Constitution stipulates that, in the first instance, it is the South African government’s responsibility to provide various public goods to the public. Policing, education, and water and electricity supply are examples of this.

Typically, airlines were treated in the same way, in SA through SAA. Thankfully, most states eventually gave up on this idea, but SAA is a living fossil record of this time.

These ideas are of course especially well established – so much so that many people find it hard to accept the idea that the market can also provide these services.

In South Africa, we have had expensive lessons on how unreliable government services can be. Nevertheless, there is still a lack of trust in private roads, private education and, yes, private electricity.

At the same time, in South Africa we see examples of the market starting to privatise services, even those “classic” public services that previously rested with the state. Currently, there are more private security guards in SA than members of the police service. Private arbitration is an established practice that can compete with the courts to an extent. Private education is also established and will most probably expand even further.

Then there is aviation, which – initially – was also seen as a public service that should be provided by governments.

The result, in South Africa’s case, is that we note a particular tension in the SAA. On the one hand, SAA tries to act like a full business, but on the other hand, it keeps clinging to the remnants of a public goods approach. For example, the company often refers to its ‘public mandate’ as justification for its continued existence amid poor performance. This fundamental contradiction likely played a role in sustaining the status quo at SAA.

In the past telephone lines (communication) were also approached as public goods. The idea that governments must provide communication services was also firmly established. This was the case until new technology – such as cellphones – brought about new market competition. The new market leaped, as it were, over the established restrictions of the old state-regulated market and undid the old government monopolies.

In the same way, the electricity market is busy undergoing a private sector revolution. Every day it gets easier to disconnect from the electricity grid. Batteries like the Tesla Powerwall and household solar energy are challenging Eskom’s monopoly and a centralised electricity network more and more. This kind of technology makes consumers more price-sensitive, and for a while now, Eskom has been facing an increasing challenge that economists call more elastic demand.

Examples like these show that markets can enter areas that were previously ring-fenced by the government for public goods.

The purpose of this piece is not to refute all arguments for public goods. We merely feel that business people, individuals and communities in voluntary markets could go much further to create alternative competitive community infrastructure in areas that were previously seen as public goods and services.

Certain types of public infrastructure – such as building national roads – are of course more complicated. Nevertheless, governments’ provision of these services is highly dysfunctional. Competition in such areas should at least be made possible by removing exclusive statutory privileges for public service providers. Eskom doesn’t need to be the only power provider.

The point that needs to be emphasised is that as technologies and market possibilities change, government policies about public goods also need to change.

This question is fundamentally about which mechanisms we should use to allocate resources. In a country like South Africa – with severely limited resources – this should always be one of the first questions we ask.

A healthy allocation of resources definitely does not benefit from governments providing services that could have been better provided by the market.

SAA is perhaps a good example. This institution has now been placed in business rescue, but it took a good number of years and many resources out of the hands of private enterprises. SAA was in fact kept alive at the cost of alternative allocation of resources in a free market.

Clinging desperately to dysfunctional public institutions isn’t efficient policy. That is why the policy on public infrastructure, which is a significant item on the national government’s budget, needs to be thoroughly analysed.

The recipe that has been followed thus far, where huge state institutions and government departments have a tremendous influence on the economy, clearly isn’t working. It would be negligent not to consider all options.

In South Africa, we feel, the role of market-based resource allocation can be considerably expanded, and the role of government-based resource allocation considerably reduced.

 

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