All Commentary
Saturday, May 1, 1993

How the Entrepreneurial Spirit is Transforming the Public Sector

Economic intervention will always result in inefficiency.

The search for a “third way” somewhere between socialism and capitalism is to the modern era what the search for the philosopher’s stone was to the Dark Ages. Although the implosion of the Soviet Union has put a damper on calls for more bureaucracy, most people harbor various misconceptions and fallacies that make them equally distrustful of fully free markets. So, yet another pair of would-be alchemists has set out in search of that elusive goal: big-government order without the big government.

In Reinventing Government, David Osborne and Ted Gaebler attempt to chart a course between big government and laissez faire. They want nothing to do with “ideology.” Rather, Osborne and Gaebler are technocrats in search of pragmatic answers. “Reinventing Government,” they write, “addresses how governments work, not what governments do.” Thus, from the standpoint of what governments do, the book is a proverbial grab bag of policy prescriptions, some good, some bad.

In the course of the book’s eleven chapters, Osborne and Gaebler lay the foundations for what they call “entrepreneurial government.” That is, government that is active, but bereft of bureaucracy and its attendant red tape and inefficiency. In Osborne and Gaebler’s paradigm, the problems that America presently faces are all a result of the reforms of the Progressive Era. The large bureaucracies set up to discourage corruption and abuses of power actually waste more resources through regulations and procedures than they save. To stop a small number of crooks, bureaucracy must tie the hands of honest employees.

Osborne and Gaebler outline a series of sweeping reforms, all aimed at changing the entire focus of government. The old way of thinking envisions a government that identifies problems and then introduces an agency or program to solve the problem. The result has been a plethora of large bureaucracies and programs targeted at specific problems but achieving no real success. Entrepreneurial government identifies broad social goals. Instead of being burdened with hierarchies and rules, agencies are allowed great leeway within which to meet the goals. The civil service system is replaced with a system that rewards innovation and holds employees responsible for failure to meet goals.

Old methods of budgeting are scrapped. The line-item budget does not permit innovation nor the flexibility needed to deal with the unforeseen. Furthermore, the practice of throwing more money into programs that do not work must end. Such a policy encourages failure. Instead, programs that succeed will be rewarded with the funds to expand. Programs that fail can be weeded out over time.

The purpose of government, Osborne and Gaebler contend, is not actually to deliver services, but to set policy. They call it steering rather than rowing. In order to deliver services, governments can contract out to private providers, utilize government providers in competition with private firms, or utilize different government firms in competition with each other. Only in the case of so-called natural monopolies such as utilities should government be the sole provider.

Osborne and Gaebler provide anecdotal evidence of the success of “entrepreneurial government.” For example, in Phoenix, Arizona, the city-owned garbage collection firm competes on an equal footing with several private firms. The result has been a decrease of 4.5 percent a year in solid-waste costs.

Another example is the East Harlem school system. East Harlem, thanks to a system of public school choice, has some of the most successful public schools in America. This is despite the dire economic conditions that prevail in the district. Students can choose between different schools (some located within the same building) operating independently, with programs tailored to meet the tastes of different students. Osborne and Gaebler seek a decentralized government, with control of programs exercised at the lowest possible level. In the Kenilworth-Parkside development in Washington, D.C., the residents were given control over their own housing project. They wrote their own by-laws and took charge of making repairs. Eventually, the residents started their own adult education program and created a fund to help finance business ventures taken on by enterprising residents.

When it replaces the bureaucracies of old, “entrepreneurial government” is indeed an improvement. Still, the effects must be temporary. “Entrepreneurial government” can only delay the inevitable. Most “entrepreneurial government” schemes still leave a gap between those who consume a service and those who pay for it. The costs are spread over a broad tax base. Only specific groups, however, actually receive the service. Thus, the “customers” are partially subsidized by non-customers. The result is that the demand for the service is greater than it would be if the customers had to pay the full price. The public good is inevitably overproduced and resources misallocated.

Of course, “entrepreneurial government” is even worse when applied to areas already relatively free of government intervention. “Entrepreneurial government” seeks to “structure” the market. As Osborne and Gaebler note, structuring “is a way of using public leverage to shape private decisions to achieve collective goals. It is a classic method of entrepreneurial governance: active government without bureaucratic government.”

The problem with Osborne and Gaebler’s analysis is its short-sighted empirical framework. In their preoccupation with finding whatever solution will “work,” they ignore basic principles of how human beings behave and how markets operate. When policy planners structure the market, they change the incentive system. Resources flow into areas in which they otherwise would not. The planners only have two choices: They can send resources to where they think they are needed, or they can send resources to where already overestimated customer demand is greatest. In either case, inefficiency will result. Even with the political reforms Osborne and Gaebler mention (campaign finance reform, term limits, etc.), decisions concerning resource allocation will still be politically motivated not economically motivated.

Economic intervention, whether performed by a bureaucracy or an “entrepreneurial government” will always result in inefficiency. Osborne and Gaebler’s attempt to make entrepreneurial government an end rather than a means is misguided. Bureaucracy is not the problem. Government intervention is the problem. Laissez faire is the solution.

T. Franklin Harris, Jr., resides in Auburn, Alabama, and is a contributing editor to Republican Liberty.