The public sector going private

In one of my previous articles, I concluded that governments differ from corporations. Both differ in their fiscal and electoral process and their structure, while they resemble in their most frequently encountered laws.

This article brings a slightly different perspective to the picture but it doesn’t serve as an antithesis to the one that is linked above. As a proactive political scientist, I have stated particular interest in the interactions between the public and the private sectors of the economy. What policies a certain government enacts and how they affect businesses has become a passion of mine that I am aspired to get more acquainted with. While this is not an easy task, it makes a lot more sense in our lives than discussing political rhetoric, for example.

Instead, this article brings an idea that we all keep in mind when discussing politics and sometimes life in general, yet never use proper terminology to explain it in four words – marginal revenue and marginal cost – we always talk about who wins what (marginal revenue) while losing what (marginal cost) out of a single decision making. Therefore, working at the margins – a rule of thumb in microeconomics – is what has to be done to take things to the next level in politics: international, national and local.

A regression analysis is that next level, though undoubtedly complicated, in finding arguably the best political decision in a certain situation assuming that a politician wants the best for their government and for their people. Unfortunately political behavior is not universal. Some politicians behave in a way they deem necessary for their re-election, others use iron fists because they are dictators, and so on. However, the fact that there is no universal political behavior shouldn’t discourage political scientists and public policy analysts from designing models based on regression analysis, and test them every time when they try to decipher a politician’s decision making.

Imagine, just for the sake of argument, that North Korea and South Korea become one country with its capital being Seoul. The regime of the Kim dynasty is toppled with probably the help of the United States and the inaction from the North’s alleged allies – China and Russia. Let’s disregard China, Russia, the United States and the other countries from the picture just to make our lives easier!

Now our next goal is to find out the profit that the South would make from such a merger – total benefit – and at what cost – total cost – it will have it. In this case, the marginal benefit and the martinal cost should be measured for the level of integration that the South Koreans would produce in order to integrate their brothers from the North. The quantity produced will be depicted by the horizontal line of the graph, the well known quantity line of the supply and demand graph in economics. In other words, it will be our independent variable.

This model might suggest that in a hypothetical merger between North Korea and South Korea, the South Koreans will not be having the goal of completely integrating the North Koreans as soon as possible if their goal is to maximize profits. Especially not as soon as possible, for their total cost of doing that for every additional won (their currency) they invest in attaining that high level of integration over a short period of time will outweigh their total benefit.

The South’s benefit is the potential for a stronger Korean nation economically, politically and even militarily which is most likely attainable at least a generation away. It will be the dependent variable, the horizontal line of the graph.

The South’s cost will be the funds needed to rejuvenate the North politically, socially and economically – the three most important aspects of our world, in my opinion. So instead of these exact funds being spent in the South on infrastructure projects, education, security, defense, health care and other services, a certain percentage of them will be spent on putting the North back in order. This is a cost to the South Korean society. The question of which one – marginal benefit or marginal cost – outweights the other remains unanswered. A calculation of the two is necessary.

The problem with this perspective

Aside from being a lot more difficult to measure all this than it is to measure how a company within a certain market would maximize profits, critics of the perspective described in this article might point out the impossibility of applying it to practice. After all, the public sector is not the private sector. It usually doesn’t produce certain units of one good but services only. Also, the government merely acts as a decision making body.

I wouldn’t completely agree with such critics. The perspective described in this article would deny the critics by assuming that a certain planned pattern of decision making by the government is in fact the production of certain units of its services, namely the total quantity produced. For example, the higher the level of education to be provided to the North Koreans, the more expensive it will be to the South Koreans in the short run, and it may also stagnate the integration process in the long run because too sudden a change to a certain people’s culture might not resonate well to that people.

What I suggest with this article is not that the public sector should behave like the private sector but that it is possible to successfully analyze political behavior by thinking like a microeconomist. We have statistics from the past and today we see results out of certain policies having been taken in the past. Therefore we are capable of analyzing past decision making and test this theory.

However, we are still less capable of analyzing the future. Case on point – for the past century there have been different super powers. Hardly had anyone thought before the Second World War that the United States would become the greatest power on Earth today, and hardly had anyone thought after the Second World War that Germany would turn into the largest economy in Europe or that that same Europe, exhausted after two world wars, would have formed a political, social and economic entity called the European Union.

Just like one of my professors of economics had said once when introducing us to the Cobb-Douglas production function – don’t trust your intuition, trust the model. It will shock you how often models reflect the truth.

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