Followup: Government as a Business

Posted on January 23, 2011


I should probably rescind my use of the word “dumb” from the title of my recent post about running the government like a business. It was a simplistic term, which was designed more to attract attention than to accurately characterize my argument. Nevertheless, it seems to have worked. The morning after I wrote the post, I found myself in a twitter debate. I won’t post the whole exchange, because it would be kind of long and tiresome. You can look it up on my twitter if you want. Suffice to say that my opponent made some fairly valid points which I think merit a response. The goal of this blog from the start was to generate some contentious discussion, so I’m glad that I’ve actually got something to respond to.

The first main point of his criticism was that governments have no more right to squander their financial, human and material capital than do businesses. This is true. While a government can acceptably run a deficit when necessary, there are limits. Deficits do hurt the economy, and it is not an ideal situation when a government is spending money that it does not have. Just because it is not an ideal situation, however, does not necessarily mean that it is not sometimes a good idea. The main difference I see here between good governance and good business is that a government can justify running a short-term deficit to a much greater degree than a business can, because for government fiscal health is only a means to an end, and can be sacrificed in service of that end. In some cases it is better for a government to work with money it doesn’t have than to cut services, so long as fiscal health can be maintained in the long term. The inverse is true of a business. A store needs to provide the service of retailing products in order to survive, but the end goal of this survival is fiscal; if the store does not make a profit, then it will eventually close. It is, therefore, sometimes acceptable for the store to reduce its level of services (for example, by laying off staff or stocking fewer products) if it is necessary to preserve fiscal health.

The second point of criticism was that governments, like business, should be primarily interested in results. With that I do not disagree. A government, however, has no obvious bottom line with which to gauge its success. There is no effective way to quantify the effectiveness of government spending. You can quantify the success of certain initiatives; for example by tracking the crime rate in order to gauge the effectiveness of a new policing strategy or by using standardized tests to gauge the effectiveness of a new curriculum, but how do you compare the social good done by the two of them if you only have enough money to pay for one? Furthermore, over-reliance on these metrics can have unfortunate side-effects, such police departments manipulating their statistics to justify further funding, or teachers teaching students to be able to take a standardized test but not do too much else.

At its heart, governing is about balancing conflicting priorities. Fiscal health is just one consideration among others such as education, crime control, military readiness, foreign aid, arts funding, and public infrastructure. There is no objective way to determine which is more important to a society. It’s impossible to govern without enough long-term revenue to cover costs, but it is also impossible to govern a country that is overrun with crime. Once priorities are set, it becomes more feasible to measure success based on return on investment, but that is more about the implementation than the inception of government services.

I will concede that government (and by extension, the electorate), needs to pay more attention to results. Sober attention to the actual effectiveness of boondoggles like the war on drugs or the war in Afghanistan would probably be beneficial. If you want to define a business as an organization which pays attention to quantifiable results, then I would agree based on that definition that a government should be run like a business. The definition I have in mind was established by right-wing guru Milton Friedman in his essay, tellingly titled The Social Responsibility of a Business is to Increase its Profits:

“In a free-enterprise, private-property sys­tem, a corporate executive is an employee of the owners of the business. He has direct re­sponsibility to his employers. That responsi­bility is to conduct the business in accordance with their desires, which generally will be to make as much money as possible while con­forming to the basic rules of the society, both those embodied in law and those embodied in ethical custom.

What does it mean to say that the corpo­rate executive has a “social responsibility” in his capacity as businessman? If this statement is not pure rhetoric, it must mean that he is to act in some way that is not in the interest of his employers. For example, that he is to refrain from increasing the price of the product in order to contribute to the social objective of preventing inflation, even though a price in crease would be in the best interests of the corporation. Or that he is to make expendi­tures on reducing pollution beyond the amount that is in the best interests of the cor­poration or that is required by law in order to contribute to the social objective of improving the environment. Or that, at the expense of corporate profits, he is to hire “hardcore” un­employed instead of better qualified available workmen to contribute to the social objective of reducing poverty.

In each of these cases, the corporate exec­utive would be spending someone else’s money for a general social interest. Insofar as his actions in accord with his “social responsi­bility” reduce returns to stockholders, he is spending their money. Insofar as his actions raise the price to customers, he is spending the customers’ money. Insofar as his actions lower the wages of some employees, he is spending their money.”

I don’t want to play semantics. You’ll have to make up your own damn mind about what exactly constitutes a business. If you apply Milton Friedman’s model to the business of governing, however then you will probably consider (as most politicians who use government-as-business rhetoric do) the taxpayers to be the employers. The result would be a government only interested in providing services which return tax dollars to those who give them with the greatest possible efficiency. You would have to be both very rich and very selfish to believe that would be at all beneficial.