Free Schools Failure

[Woodchopper]

Going back to Fishnut's question.

I would like to ask a potentially stupid question. Can someone please explain to me how contracting out essential services to for-profit companies benefits taxpayers?

You've all focused upon efficiency and value for money. But the most important argument in favour of the private sector taking over roles from government is innovation. Basically government is usually much slower to bring in transformative technological change. By transformative I mean that the entire activity is changed - for example shifting from renting physical video tapes to streaming, or from landline telephones to mobile.

Of course governments can innovate, but they have big problems with transformative change as it usually involves large numbers of people no longer having a job (eg all the employees of video rental stores). The people who lose out can block innovation or limit its extent.

In the private sector, a company that doesn't innovate (eg Blockbuster) gets replaced by one that does (eg Netflix). That's sh.tty for all the people who worked at Blockbuster, but overall society benefits from much greater choice, better TV shows, lower costs for regular users, and far less use of physical resources (and so carbon emissions). On the latter just think of all the car journeys to the local Blockbuster store that no longer happen.

That doesn't mean that all sectors should be replaced with private firms. Natural monopolies are probably better off in the public sector. There also appears to be inherent limits to how much innovation could transform, for example, education or healthcare. Both are still based upon an expert interacting with a small number of people. So incremental change may well be the best we can hope for and so the innovation argument is weaker.* We do though rely upon private companies for aspects of healthcare where innovation is very important, such as developing new drug treatments.

*It does though seem conceivable that future advances in AI could transform education and healthcare, for example if everyone could have a personal robot doctor or teacher we wouldn't need humans to do that (or at least not as many of them). But that's a long way off, if it it could happen at all.

[dyqik]

We do though rely upon private companies for aspects of healthcare where innovation is very important, such as developing new drug treatments.

Do we? Most fundamental drug innovation is done in universities with public money. Drug companies do the step of converting basic research into marketable products, and delivering that to patients.

If you take the view that the marketing part* isn't strictly necessary in a public healthcare model (which is somewhat a natural monopoly**) then the developing fundamental research into a manufacturable form and testing it part (which has a lot of government oversight) maybe doesn't have to be a private sector activity. Currently it is though, and that has implications for the cost of drugs.

* Including the patenting, redevelopment of older drugs into new patents, etc.

** Even in the US healthcare market, the two largest buyers of drugs are forbidden from negotiating on price. Which smells like market failure to me.

[dyqik]

We do though rely upon private companies for aspects of healthcare where innovation is very important, such as developing new drug treatments.

Do we? Most fundamental drug innovation is done in universities with public money. Drug companies do the step of converting basic research into marketable products, and delivering that to patients.

If you take the view that the marketing part* isn't strictly necessary in a public healthcare model (which is somewhat a natural monopoly**) then the developing fundamental research into a manufacturable form and testing it part (which has a lot of government oversight) maybe doesn't have to be a private sector activity. Currently it is though, and that has implications for the cost of drugs.

* Including the patenting, redevelopment of older drugs into new patents, etc.

** Even in the US healthcare market, the two largest buyers of drugs are forbidden from negotiating on price. Which smells like market failure to me.

Which is not to say that private finance and providers aren't good at innovation: e.g. in cars, consumer goods and media, etc.. Just that drugs isn't the best example.

[jimbob]

We do though rely upon private companies for aspects of healthcare where innovation is very important, such as developing new drug treatments.

Do we? Most fundamental drug innovation is done in universities with public money. Drug companies do the step of converting basic research into marketable products, and delivering that to patients.

If you take the view that the marketing part* isn't strictly necessary in a public healthcare model (which is somewhat a natural monopoly**) then the developing fundamental research into a manufacturable form and testing it part (which has a lot of government oversight) maybe doesn't have to be a private sector activity. Currently it is though, and that has implications for the cost of drugs.

* Including the patenting, redevelopment of older drugs into new patents, etc.

** Even in the US healthcare market, the two largest buyers of drugs are forbidden from negotiating on price. Which smells like market failure to me.

Which is not to say that private finance and providers aren't good at innovation: e.g. in cars, consumer goods and media, etc.. Just that drugs isn't the best example.

Also where is the profit? The market price for the next Viagra is going to be significantly more than a magical one off drug that cures sickle cell anemia as those who are affected would be willing to pay more.

[Woodchopper]

We do though rely upon private companies for aspects of healthcare where innovation is very important, such as developing new drug treatments.

Do we? Most fundamental drug innovation is done in universities with public money. Drug companies do the step of converting basic research into marketable products, and delivering that to patients.

I'd think of that as the difference between basic research (eg finding out how the universe works) and innovation (creating products and supplying them). Certainly publicly funded universities are best at the former, but I'd argue that the private sector is better at the latter.

If you take the view that the marketing part* isn't strictly necessary in a public healthcare model (which is somewhat a natural monopoly**) then the developing fundamental research into a manufacturable form and testing it part (which has a lot of government oversight) maybe doesn't have to be a private sector activity. Currently it is though, and that has implications for the cost of drugs.

* Including the patenting, redevelopment of older drugs into new patents, etc.

** Even in the US healthcare market, the two largest buyers of drugs are forbidden from negotiating on price. Which smells like market failure to me.

It doesn't have to be a private sector activity. The argument in favour is that the private sector is that its better able to take risks.

It takes about 10-15 years and circa a billion dollars to develop a drug treatment, but according to conventional wisdom only about 10%* of the newly developed drugs actually become successful treatments. That works for the private sector so long as the 10% of drugs that are successful cover the losses made on the other 90%. If it doesn't work out the company will probably get taken over by another. Bad for the individuals involved but not a societal problem.

But at least in democracies, its difficult for governments to take those kinds of risks. There would be enormous criticism of a British minister who was seen to have spent, say, five billion pounds on a series of failed drug treatments. The minister pointing out that sooner or later they'd get a successful treatment wouldn't cut it with a lot of the voters.

The problem isn't the money lost. The problem is that the minister and their civil servants will tend to be risk averse and not take a chance on a new and untried technology. Not spending money is far safer than spending billions on a 1/10 chance of it working out. The result is that the one successful drug never gets developed, and millions of people don't get to be cured of their illnesses.


*exact percentage may be different, but the principle will remain that the majority of candidate drugs don't make it.

[nekomatic]

Do we? Most fundamental drug innovation is done in universities with public money. Drug companies do the step of converting basic research into marketable products, and delivering that to patients.

I'd think of that as the difference between basic research (eg finding out how the universe works) and innovation (creating products and supplying them).

This - the usual definition is that research converts money into ideas, innovation converts ideas into money.

edit: botched quote

[dyqik]

Do we? Most fundamental drug innovation is done in universities with public money. Drug companies do the step of converting basic research into marketable products, and delivering that to patients.

I'd think of that as the difference between basic research (eg finding out how the universe works) and innovation (creating products and supplying them).

This - the usual definition is that research converts money into ideas, innovation converts ideas into money.

edit: botched quote

That's a definition that says that innovation does not involve any inventive or innovative steps.

[jimbob]

I'd think of that as the difference between basic research (eg finding out how the universe works) and innovation (creating products and supplying them).

This - the usual definition is that research converts money into ideas, innovation converts ideas into money.

edit: botched quote

That's a definition that says that innovation does not involve any inventive or innovative steps.

Not really.

That describes a lot of engineering. Yes there is also a bit of turning money into ideas, but with the goal of turning the money into something more valuable.

[dyqik]

This - the usual definition is that research converts money into ideas, innovation converts ideas into money.

edit: botched quote

That's a definition that says that innovation does not involve any inventive or innovative steps.

Not really.

That describes a lot of engineering. Yes there is also a bit of turning money into ideas, but with the goal of turning the money into something more valuable.

Innovation = new ideas, new procedures, whether that's fundamental insights or new applications. Innovation is the generation of new ideas at an applicable level.

Following established procedure, e.g. to bring a drug to market, or space qualify a technology, or get type approval for a vehicle, is not innovation. Like most safety critical engineering, it's not an area where rapid innovation in processes should be encouraged.

[Sciolus]

But at least in democracies, its difficult for governments to take those kinds of risks. There would be enormous criticism of a British minister who was seen to have spent, say, five billion pounds on a series of failed drug treatments. The minister pointing out that sooner or later they'd get a successful treatment wouldn't cut it with a lot of the voters.

The problem isn't the money lost. The problem is that the minister and their civil servants will tend to be risk averse and not take a chance on a new and untried technology. Not spending money is far safer than spending billions on a 1/10 chance of it working out. The result is that the one successful drug never gets developed, and millions of people don't get to be cured of their illnesses.

There are a couple of good reasons why the public sector should be risk averse. First, risk appetite must take into account the consequences of things going wrong. In the private sector, the worst that can happen is the company goes bust, people lose money and lose their jobs, but if the demand is still there the market will fix things up. In the public sector, there are still financial risks, which can be large since they often deal with large sums of money and the consequences of failure are severe (see various local authorities for how to screw those up). But as well as money, because they provide essential services, there is considerable scope for screwing over people's lives severely. Basing education on untested dogma rather than evidence can cause immense and long-term harm to individuals and to society, to drag this derail back on topic.

Also, a factor in the tolerability of risk is whether it is voluntary or not. Risks taken on voluntarily are more tolerable than those imposed on people. People don't choose whether to pay tax, so gambling with their money is less tolerable.