Possible Insight

Production Function Space and Government Inefficiency

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This weekend, I was at a party chatting with two of my friends who have PhD’s in Education.  They were explaining the sources of the inefficiency they see in the public school system.  That’s when I had yet another Production Function Space (PFS) epiphany.

Recall my previous discussion about how I think large companies devote much of their energy to searching PFS rather than implementing specific production functions.  However, in listening to how public education works, the contrast struck me.

Only a tiny sliver of effort goes to searching PFS in public education. Instead, the vast majority of overhead consists of two tasks. First, because there’s no market discipline, government organizations use a rigid system of rules in an effort prevent waste.  So they have a bunch of people and processes dedicated to enforcing  these rules: the bureaucracy. Of course, in an ever-changing landscape, these rules aren’t anywhere close to optimal for long.  But hey, they are the rules.  So a big chunk of effort that would go towards innovation in a commercial organization actually goes toward preventing innovation in a government organization. Because there’s no systematic way to tell waste from innovation without a market.

Without market signals, there’s also no obvious way for employees to improve their position by improving organizational performance.  But don’t count out human ingenuity.  That’s the second substitute for searching PFS: improving job security and job satisfaction.  So you see workers seeking credentialing, tenure, guaranteed benefit plans and limitations on the number of hours spent in staff meetings.

From what I’ve read, this observation generalizes to other government agencies.  If searching PFS is a major source of continuous improvement in commercial organizations, it’s conspicuous absence in government organizations means they are even less efficient than we thought.  We don’t just lose out on the discipline of market signals today.  We lose out on the inspiration they provide for improvement tomorrow.

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Written by Kevin

January 31, 2011 at 9:23 pm

Posted in Economics, Government

One Response

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  1. […] my Production Function Space (PFS) hypothesis produced a few decent insights (see here, here, and here), it had some major flaws. First, it completely ignores the demand side of the equation, […]


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