Cost Capping in the Provision of Social Wage Goods;

a case where a "Solution" begets the Problem.

Keith Rankin, 4 April 1998

Social policy in New Zealand is not really about creating outcomes or high levels of social service provision. Nor is it a simple process of cutting costs. Rather it is a process of capping costs in the provision of social wage goods. Bulk funding, be it of health care, schools, universities or social welfare is the essence of a capped system. It is the opposite of a market system which is driven by demand. Systems of cost capping are intended to thwart increases in demand for collectively provided services (social wage goods). It is a process of redirecting demand, to get consumers to buy second or third choice products such as private health care, private education or private social insurance. It is a process of converting social wage goods into private goods.

The process of capping costs is one of creating costs; ie creating the transaction costs of the capping process itself. This is, in essence, the cost of the new management structures; structures only required by governments who believe, or purport to believe, that capping costs reduces overall costs, despite creating new costs.

In an uncapped system, hospitals, schools and other collective activities draw resources from a central pool that appears to each participant to be bottomless. Hobbesian (aka Benthamite) ideology assumes that humans will satiate themselves from any such "unlimited" resource pool. The problem with this supposition is that humans are intelligent social animals. Real human beings, while self-interested, are normally unselfish. As such, human communities only draw on the resources they need to fulfil the demands made upon them. It is entirely natural for humans to conserve the resource pools they draw from.

Selfishness is, at most, a common exceptional condition. All communities have to deal with it. But by far the most efficient method is "quasi-voluntary compliance" (ref. Margaret Levi, 1988, Of Rule and Revenue) and not the coercive Hobbesian compliance procedures that have characterised the neoliberal reform process. There are two situations in which unselfish human beings or human agencies are driven to break that rule.

First, when selfish parties draw from common funds, reflecting a breakdown in the quasi-voluntary compliance which is the hallmark of the democratic process. Unselfish people are then forced to match such drawings just to stop themselves from being robbed of their shares. Chronic tax avoidance is an example of such a downward "lose-lose" spiral; a spiral graphically depicted by Hobbes as a "war of all against all". This is probably the process behind the declines, often rapid, of past civilisations.

Second, if pools are subdivided and individually allocated, then people, whether selfish or not, will tend to draw their full allocation. This will be especially so if agencies which draw less than their full allocation are "rewarded" with reduced allocations in subsequent years. Thus, if school teachers are told that they must only take 3 weeks annual leave, then all of those who had chosen to work through the school vacations will now take their full allocation of leave, including sick leave, and may be less willing to take on unpaid duties. Individual allocations encourage "lowest common denominator" strategic behaviour.

The best, lowest cost world, is one based on collective trust. In a trusting world, we don't incur the costs of cost-capping. And we are socialised to conserve - indeed enhance - the resource pools that we as civilised socialised beings depend on. One of those resource pools is called "good will", a defining feature of an efficiently self-managed society.

A society with firmly capped public health and public education systems may have cheaper public systems. But their productivity in terms of health or education outcomes will be severely reduced; ie they are more costly despite being cheap. The capping process therefore creates social burdens in the form of the private provision of social wage goods. The total resource cost of the health care industry is greater under the capping-cum-commercial model. In the USA in the early 1990s, Americans spent on average four times as much as New Zealanders on health care. Yet Washington DC had Third World levels of infant mortality.

Taxes, unpaid work (indeed unaccounted work) and a social wage are fundamental to civil society. Tax compliance is, in large part, a feature of a gift economy; a natural human economy that serves as a counterpoise to the market economy. The two economies exist side-by-side, with synergy when trust exists, with tension when trust is absent.


© 1998

Rankin File | 1998 titles