Let's pause and think how that can be. The root causes will maybe tell us why, but to start with there is a very strong driver: people know, they just know, that only private sector jobs are for real (I've been explained by a French hedge-fund analyst that any extra public job in France destroyed two private-sector ones. No, he could not quote the study or give a sensible mechanism. But he knew it). When you are lucky and talk to someone who realises that public jobs are for real -hi there teachers, nurses, firemen..., you may still be told that only private sector-jobs are good quality ones.
In fact, I was told just that over dinner by a friend, while discussing the François Hollande press conference. After stating that he was convinced that of course supply created its own demand, because "look at the I-phone" (OK, first, that's not what it means, and Hollande specifically said that the point was to produce more and that it would produce the demand, which has nothing to do with a successful marketing campaign, then far from all product launched make it to market leader, then... oh, well...), he ventured that because my explanation of why Say's law was a fallacy was strikingly obvious, Hollande, who is not stupid, cannot have meant that. I greatly doubt it, but was willing to move on. His point was that this was not the highlight of the conference, rather than at last some clear truths were being spoken, such as the fact that only the private sector produces quality jobs.
This was an intelligent man with no obvious hatred of unsuccessful people, so I would not claim that it was just bigotry, far from it. However, this was also someone who has, for years, mostly interacted with rather well-off people working in private companies, so an echo chamber effect may be present.
I tried to ask questions and argue. To my question about what he meant by State jobs not being real jobs, he answered that it was clearly so since the State could not generate any revenues, and thus only had costs, that had to be financed by private, ie real, jobs. I could (should?) have taken time to ask whether we should conclude that a teacher, a firefighter, a policeman were not doing real jobs just because they were not directly charging for it. Or that the source of State financing did not need to be taxes on private sector jobs.
But I simply pointed out that the State was quite capable of revenue-generating activity (and, indeed, since some people pay for school and healthcare, teachers and public doctors should fall within that category). I was asked for an example and suggested that a State-owned power plant would get revenue commensurate with the electricity provided. The answer was that then it was invariably at much too high a cost for the service provided. I had to point out that electricity, at the time of talking, was cheaper in France than in most EU countries. His answer was that "the scandal is that electricity is so expensive even though we have nuclear power". I admit to being unable to follow the reasoning. If you reckon that nuclear is cheaper and that the private sector is always better, then how come you don't get cheaper private sector nuclear? Unless you reckon (as the UK shows) that the private sector can hardly manage to produce nuclear power, but then if the State is able to do something the private sector cannot do, doesn't that defeat the premise that the State is always less successful?
But this did not shake his belief: I was then told that the private sector was always more efficient because there was a shareholder who would get rid of management as soon as any waste appeared. This was interesting on many level -not least because that is, I feel, the usually trotted out rationale.
First, rack your brains and try to come up with situations where shareholders were able to depose a company's management because there were too much avoidable costs (big companies, please, since we are comparing with the public sector there). I'm not saying that it NEVER happens, but it would have to be pretty common to provide a systematic cap on private sector cost structure -one that needs, for the purpose of the argument, to make it sufficiently strong to have enough cash to pay strong dividends (6% ROE appears to be the expected norm, crazy as it may sound) and still be cheaper.
I can think of very few where the company's capital was highly diluted. Yes, CEOs are sometimes put in very difficult situations and are persuaded to leave (so are public sector executives, by the way -probably even more frequently), but that is very rarely from a vote at the AGM. Yet it cannot be because there was never a reason to do so: companies do fail often, or are rescued from bankruptcy. And when capital is highly concentrated, the reasons for a fall in favour can be very varied. A perceived need to promote someone's nephew is a common one, for instance. To suggest that having shareholders makes the private sector hugely (remember -it needs to be over 6% cheaper to even begin to make sense), you'd need to have found a way to entirely do away with the principal/agent issue, and then some.
Second, whatever the power of the shareholders, their incentives are by nature (and increasingly so) shorter term than the State's. States expect to be around forever. Shareholders would delude themselves if they thought they were immortal, and in any case the average time a position is held these days has dropped considerably (if I believe an investment banker, it is in the range of a second, although I reckon he was confusing average and median. Still...). Indeed, the incentive to control costs in big firms is typically Does a highly short-term focus make jobs better "quality"? Not with my perception of the word anyway.
And it's not just about shareholder incentives: States borrow -to the extent that they need to, which is the case for France as it no longer has a Central Bank- at a lower rate than the private sector. Therefore, any activity that needs to purchase long-lasting equipment gives the public sector a strong cost-structure advantage.
Third, much of economic activity involves externality. As I told my friend immediately, I don't see any particular reason for my local hairdresser to belong to the public sector (not that it would be an absolute catastrophe if it were, as long as I could get my hair cut the way I want it cut. Not that my private-sector hairdresser really does, actually, but it's never bothered me for very long). However, a lot of economic activity (and, in Depression times, pretty much any economic activity) will have strong externalities, where a private actor will simply not have enough direct impact on itself to have any particular reason to aim for the right optimum. Sometimes, even the State is far too small: think of things like climate change, or halieutic resources, which are world-wide problems where any given State, be it the size of the USA, is a minority recipient of the costs involved, and therefore a natural player in the tragedy of commons.
If the way a company does business is likely to harm public health, it will not be a major problem for its P&L, and you may expect suboptimal efforts at reducing the risks. In fact, that is true of all major risks, even when the company would be killed in the process: it has limited liabilities, and any actor may have gone before the problem occurs. Of course, it can even be too big to fail, and therefore not be in any danger at all. We are not short of direct evidence that the financial sector can be liable to taking more risks than is socially optimal.
Finally (well, I'm sure there could be other points but let's wrap it up), data. In the end, whatever the theoretical reasons why it should not be obvious that the private sector performs better necessarily, it would seem that what matters is what actually happens (and I do believe that efficiency is not the only objective -but that seemed to be what we were discussing). I did mention to my friend that, despite his statements that public sector meant colossal waste, the public sector seemed to compare favourably in quite a few direct comparisons. For instance, it costs far less in overheads to administer a public fund (say, Social Security in the US) than a private pension fund, or indeed headquarters costs for a bank -yet they are pretty similar activities. His reply was that it could not be compared, although he did not say why -my take was that it was a case of rejection of the approach because of a dislike to the conclusion.
In the end, he asked me why I wanted that the public sector ran the whole economy. I replied that I said no such thing, that there were some businesses where I did not see any pressing reason for the State to be involved at all -like my hairdresser. He then said "at least that's reassuring, because I was under the impression that you wanted to go all Russia".
Ah. Russia. Well, this is a long enough post as it is, so I'll have to leave for another post what the example of Russia does and does not tell us. Let's just for this one time point out obvious reasons why it was not a decisively meaningful comparison there:
-To simplify things, Russia banned the private sector. That is very different from creating public employment. Nobody (well, pretty much nobody) suggests banning private sector employment. Of course, some people will tell you that it is the same result in the end, because the private sector cannot compete where there is a public option. That is an interesting opinion, but one that would seem to be somewhat inconsistent with the view that the private sector always performs better. In fact, in this case, the State would not even compete at all, since the point is to employ people that the private sector is currently not employing (see Spain, Unemployment of).
-Russia was poor compared to the G7 in the late 1980s (today's commodities prices would have made a huge difference to that, by the way). Russia was also desperately poor compared to the same countries in 1916 -probably more so than in the 80s. In the meantime, most of the developed world did their utmost to prevent them trading, and to exacerbate their already present tendency to spend too much on the military. Many countries did not have a communist regime and also failed to massively outcompete the G7 over the same period. Trotting them out as a refutation of the role of public spending in a mixed economy is neither here nor there.
The horror in Russia was much more closely linked to political violence and lack of liberties. That is something that can also be said of, say, Pinochet's Chile, despite it being the testing ground of Chicago Economics, the most right-wing of all.
But this is what it is. Again, let me repeat that this was an intelligent man, and not a naturally mean one. A few days later, I heard another, similarly kind man, although also one who would probably spend most of his life talking to senior managers, state that he expected the economy to pick up because Hollande was at last turning to the right direction and "the confidence will grow over 2014". Paul Krugman will go down in history as the person who coined the "Confidence Fairy" -it is apparently alive and well in France. Never mind that no model can explain how it would work, never mind that we have many years of data in many countries, all pointing in the same direction, people in France know, they just know, that this is the way to go.
And I suggest that a lot of it is groupthink. I am told that this is the view of Economics that is taught in business schools. And while I have been advised that people may find it tiresome that I openly defend some of my beliefs, it is never considered tiresome to promote right-wing slogans in the business world, certainly not at management level and above. Add in a drop of survival instinct from those who don't feel it makes much sense, and very soon you have all the making of a perfect echo chamber. Never will it be considered distasteful in wealthy company to complain about punitive taxes on the rich (despite them being at record lows) or on companies. But try and suggest that something should be done to diminish inequality and/or rents, and you might as well have directly applied to the social pariah club. We have, like Orwell anticipated with newspeak, moved into a situation where it is a condition for admission in any somewhat influential circle that one voices right-wing propaganda, or at the very least nods in agreement when it is spoken.
And I don't think we'll get very far until we break this unison.
A version of this diary was posted on my blog Anachronicles.