Free Markets, Altruism, Human Nature, and Public Policy

This article (Economist sub. req.) discusses the ideas in this soon to be released book. The crux of it is – for public services, should society rely on altruism or self-interest? Both are natural human tendencies, although altruism is less frequent, more complex, and ultimately selfish in that it works best when the altruism is reciprocated.

EGALITARIANS are instinctively suspicious of market forces. Markets breed inequality, they believe. In ordinary markets, that may well be true. But this fact should not blind egalitarians to opportunities for using "quasi-markets", which combine market forces and public money, in ways designed to promote equality. So argues Julian Le Grand of the London School of Economics in a fascinating new book.

"Motivation, Agency and Public Policy: Of Knights and Knaves, Pawns and Queens"* examines the theory and practice of "quasi-markets" for public services. The book is short, accessible and profound. Drawing on theory, case studies and surveys of the literature, Mr Le Grand argues that the left is missing a trick. Market forces, he says, can often serve its goals better than the methods socialists and social democrats generally favour.

The left's distaste for mixing markets and public services springs partly from two deep-rooted ideas. One is that governments and their officials, when acting as providers, do what they think is good for society, not what they think is good for themselves: as Mr Le Grand puts it, the left assumes that providers are "knights" not "knaves". Second, the left sees recipients of public services as having no scope for action on their own initiative. Citizens act as they do because of the economic environment into which society has put them. As consumers of public services, they are passive beneficiaries: "pawns" not "queens".

I agree. How can anyone think that government has unselfish interests? Government managers are, in my limited experience, much more concerned with power, reach, and building little fiefdoms than managers at corporations. I have never seen a "it's for the good of the people" attitude, although surely there are a few people like that out there. The most interesting point of the book is that some public suppliers are motivated by both altruism and self-interest.

The idea that altruism and self-interest are both at work in the supply of public services has interesting theoretical implications, which Mr Le Grand teases out. For instance, how does supply react to price? An altruist will supply some services even if the payment received is zero. A small payment, if it were seen as recognition of the provider's sacrifice, might then encourage additional supply. But increase the payment further and you could discourage supply, by tainting the event as a market transaction and reducing the altruist's intrinsic reward. If the payment were then increased further still, the supply of the service might start to rise again, in the standard economic way, as the positive power of self-interest overwhelmed the diminishing power of altruism. In short, a mixture of the two motives can produce a wobbly supply curve.

This sort of reminds me of the debate that went on at the University of Kentucky MBA program while I was there. On the one hand, if the program became more selective it could recruit and thus turn out higher quality students, on average. But the purpose of the university was really to provide cheap access to education for the public. Should they deny certain capable students entrance because they only take the best of the best? Would that really benefit anyone other than UK? The article goes on to end with this:

The book ends by drawing attention to the classical-liberal tradition that makes an even larger claim. Markets can be not only empowering, efficient and equitable; not only moral in the sense that they can reinforce altruism; but they may also civilise people's behaviour towards one another. As Montesquieu put it: "commerce…polishes and softens barbarian ways." Unlikely, you say? Read Mr Le Grand's splendid book, which adduces some intriguing modern evidence in support of this idea too.

Markets can reinforce our natural tendency toward reciprocal altruism. A nice point, and one that I fear too few people understand.