Most (perhaps 98 per cent) of the economists across the world have a blind spot: the economics of governance. And 100 per cent of Indian economists have that blind spot.
Have you ever seen someone who keeps their home clean and beautiful but makes a mess outside? This is the key to understanding the microeconomics of governance.
Collective decisions regarding which public goods constitutes part of public choice theory. This discusses the design of the institutions of democracy and their many limitations.
But there is an under-developed branch of public choice theory which assesses whether the individual actors in specific institutions of governance can deliver the goods we want, and why most such institutions in the developing world perform so poorly. Essentially, this is about understanding the incentives of individual players at the microscopic level. There is a huge difference between managing something in the private sector (which the discipline of management looks at) and managing public goods, which is the subject of public administration.
Chapters 4 and 5 of Breaking Free of Nehru contain an elementary discussion on the microeconomics of the main governance institutions of India. The analysis involves examining the principal-agent-subagent problem and consideration of the costs and benefits for the parties involved (politicians/ bureaucrats). In these chapters I pick up key variables in the electoral system and bureaucratic system and analyse why these are poorly designed, and will lead to perverse outcomes.
My slides prepared for the 2013 governance reforms conference should be seen as forming part of this branch of microeconomics. My talk at that conference summarises key aspects of the microeconomics of governance:
Much of Arthashastra by Chanakya contains the microeconomics of governance (although he tends to present the conclusions of his analysis, not the underlying argument).
There is also a considerable analysis of microeconomics of governance in the new public management literature, followed in countries like Australia and New Zealand. My article on the Victorian bureaucratic system highlights part of this analysis. The aim of this branch of microeconomics is to ensure that there are sufficient incentives to perform and deliver results.
In brief, this branch of economics is about understanding how the citizen (principal) can get the bureaucrat (his sub-agent) to do what he wants through his agent (politician).
This involves similar principles to the standard principal-agent problem, but because of the vastly greater information gaps, uncertainty, measurability issues, etc. involved, this is a more difficult problem to resolve than the more simple principal-agent problem typically considered in the field of management. There is far more gaming, far greater moral hazard, far more costs of monitoring and enforcement, than in a simple private sector principal-agent problem.
There are also issues regarding the social contract (which I've addressed in Discovery of Freedom). – on which far more work has been done by economists in the recent past.
I must say that practitioners of public administration in the West have largely understood the basics of this branch of economics, as a result of which they have designed largely functional institutions. But perhaps Singapore outdoes all of them in the depth of understanding displayed.
Time permitting, one day I'll write a text book on the microeconomics of governance. Without understanding it, no one can deliver public goods at an efficient cost.
My comment here:
I believe the key issue is never ownership per se, but the incentives at the micro level. Government owned organisations can perform wonderfully well, as demonstrated by Singapore (see section on Tamasek in my blog post, linked below):
I've been investigating the microeconomics of governance – a subject deeply neglected by economists – over the past 15 years. Many useful insights are obtained from operating at the micro-incentives level. http://www.sabhlokcity.com/2014/08/the-microeconomics-of-governance-the-principal-agent-subagent-problem/
If the incentives are right, then government ownership should NOT present a problem for then the citizen (principal) is directly able to achieve his/her goals at the lowest possible cost.
In most cases, however, the incentives are not right – mainly because politicians are ignorant and economists don't care about details. In those cases Friedman and Rothbard are right (even if they may exaggerate in a few cases). Those are the more common cases.
Economists are generally unwilling to examine real institutions (their incentives to publish are stacked against such detailed analysis). If they do so they'll need to examine employee contracts, funding models, etc. That's a lot of hard work. Much easier for lazy mathematicians to make wild assumptions and preach "ideology". That's an unscientific approach, however. It is time for economists to study real institutions in great detail.