Where have all the economists gone, long time passing?

Chatting today to a colleague, we talked about the importance of system design in public policy. The same thing holds true, of course, for private sector business management. In the public policy case, the trigger was the difficulty of knowing just what the the latest proposed changes in higher education actually mean.

On a somewhat related issue, I really miss not being able to properly use the analytical tools I derived from economics in my work. Of course I do to some extent, but its actually quite hard to present economic arguments when the knowledge of mental constructs or analytical techniques are no longer there. I am thinking here not of debates on macro policy, nor of arguments based on particular intellectual models that have become absorbed in the culture, but of economics as an intellectual tool kit used to analyse particular problems. Neither a spreadsheet nor a financial model does an economist make.

I worked as a professional economist for over twenty years, a period  when economists came to rule the roost. Now in my professional life, I rarely meet one. It’s actually quite hard; nobody knows what  am talking about. 

In industry economics, and that’s all about sectoral change, we talk about about industry structure, conduct and performance. If I use those phrase, nobody knows what I mean. But how can someone talk about sectoral change when they don’t understand anything about the dynamic, the intellectual issues associated with industry performance?

This may not sound important, but in a world where so many activities are being outsourced, how can you make judgements about actual effects if you do not have any knowledge of industry economics?  Let’s grow the not for profit disability sector. Wait, we have a capability gap; let’s have a capacity building program.  Wait, now we have a governance gap; we don’t have enough board members or senior executives to meet needs. Let’s have a governance program. Wait, our suppliers are going broke because we are not paying them enough; we have to restructure our payments schedule. Wait, we  now have a quality problem; we need a new quality program. And so it goes on.

None of these programs are necessarily bad. The point is that they could have been avoided or at least reduced with the most basic industry economic analysis.

Economics, or at least some variant of it, is important in determining what will be outsourced. That decision made, the remaining economists absolve themselves of responsibilities. It wouldn’t matter so much if Western countries did not have a risk avoidance culture. Let’s take an example.

Say we want to grow the not for profit disability sector as fast as we can. That will bring longer term benefits. In the traditional private sector model, failure is part of the central equation. Businesses fail because they do not meet market demand in the most cost effective way. Employees suffer, as do some customers. That’s a necessary cost  to gain the maximum economic benefits. 

This can’t happen in the pubic sector. We outsource because economics tell us that this maximises public benefit, Business failure is part of the price. But, actually, we can’t do this, we can’t let the market decide. We reject the fundamental dichotomy between the failure the market demands and the reality. Our risk management strategies demand that we find a way to avoid failure. So we go for a twisted system that , in the end, gives the worst results. It’s all very difficult.

Postscript

Universities Australia had an interesting piece on the projected cost in Australian university fees. You can access it via this ABC story. Universities Australia is the universities’ industry association, so one has to be cautious re special pleading. Still, the numbers are interesting. Meantime, UNE VC Professor Annabelle Duncan has been talking to students. The university has just been ranked number one in Australian on-line offerings. It needs all the positive rankings it can get in our new world.

I haven’t said this before, but I am not necessarily opposed to uncapped fees. However, I do think that there is a design weakness in the current arrangements giving rise, in part, to what commentator DG has called moral hazard. There is a moral hazard in the universities can set their fees with someone else paying other than the customer. There is moral hazard in that a student can buy with the knowledge that they don’t have to pay.

From a Government perspective, there is an open risk of greater pay-outs now, lower paybacks later. That could become unsustainable. So, in system design terms, the Government has to set a cap on its payments. If a university wants to charge more, then the student pays out  of his/her pocket.