The Observer (UK): Time for a commercial break: As the (charitable) Shell Foundation puts it in an important position paper this week, 'in theory, practice and common sense, most routes out of poverty for poor people start with enterprise' (ShellNews.net) 6 March 05

Markets are all very well, but using them internally or in the public sector can be dangerous, writes Simon Caulkin

Sunday March 6, 2005

Lord Browne of Madingley, aka the chief executive of BP and one of Britain's few businessmen of world stature, raised eyebrows a few weeks ago by questioning the use of 'pseudo-markets' in the public sector. He raised the issue in unscripted remarks at the World Economic Forum in Davos and then, to be sure there was no mistake, repeated them in an interview in the Daily Telegraph.

'Public service and business are different,' he insisted. 'To take business techniques into the public sector lock, stock and barrel can be damaging and dangerous.' Using market forces to deliver public-sector services could damage the professional ethos in hospitals, universities and prisons, he argued - and unleashing the commercialism of markets where they weren't appropriate could provoke a backlash against business generally.

Browne's remarks should be seen in the context of a steady reappraisal of economic forces which is throwing up some unlikely reversals. Thus, some of the most creative thinking about markets is coming from the moderate left. It has realised that markets don't operate in a vacuum - their power is directed by rules, and the rules are man-made.

For example, business-sophisticated NGOs have twigged that the combination of competitive markets with creative regulation can be a potent catalyst for environmentally friendly innovation, leaving traditional business organisations, which oppose all regulation, in the invidious position of trying to deny that markets work.

Likewise, developmentalists in despair at the failure of traditional aid remedies to take hold in poverty-stricken nations in Africa and elsewhere are pushing the merits of 'pro-poor enterprise'. As the (charitable) Shell Foundation puts it in an important position paper this week, 'in theory, practice and common sense, most routes out of poverty for poor people start with enterprise'.

As Browne intimates, however, this doesn't mean that market forces apply everywhere. There are some areas where the market doesn't belong. The chief of these is within organisations themselves - including companies.

In fact, education is a market, in the sense that people (if they are wealthy enough) or governments can choose to buy it from competing suppliers, whether their own or from organisations in the private sector. So is healthcare (although not law and order). But that doesn't mean schools or hospitals are markets - even fee-paying, for-profit ones.

Markets and organisations are different things with different functions. Markets are part of the economic ecology within which organisations, whether public or private sector, operate. As in any ecology, each is necessary to the other, and the health of the economy as a whole depends on the vibrant interaction of the two. Since organisations are by definition not markets - otherwise why should they exist? - it's not surprising that the rules by which they operate are different (or should be) too.

In fact, even though it operates in a market, behaving like a market internally is a recipe for disaster for any organisation, whether prison, university, corner shop or, for that matter, BP. Markets are blind. They thrive on competition, choosing the 'best' through the separate choices of many individuals and by the same means rejecting the weakest. As economist John Kay puts it, markets achieve coordination without the intention of a coordinator.

But organisations are not blind. They have 'intentionality' and the power to make choices. For example, to reach their goals they can sacrifice present efficiencies for the sake of larger gains in the future. That's why they spend money on R&D. Or they can choose to subsidise weaker parts of the business while they build them up to the point where they become self-sustaining. They can choose not to outsource a department or func tion to a 'cheaper' specialist because the expense is outweighed by the contribution it makes to the wider whole.

Organisations therefore thrive on co-operation and reflection on how best to fulfil their intentions by collective means. In these circumstances, importing market rules, such as performance management based on sharp, market-like incentives, is counterproductive. Why, in team sports such as cricket or football, aren't players rewarded on individual feats of run-making or goal-scor ing? For the good reason that teams intuit (as many private and public sector organisations fail to) that this would wreck the co-operative effort required for the broader goal of winning.

Interestingly, Lord Browne's BP tempers its incentives with mechanisms that encourage managers to co-operate. Its system of 'peer review', in which managers have to win approval for their year's plans from their colleagues at the same level, is complemented by 'peer assist', an arrangement where top-per forming units take on responsibility not for taking over bigger empires but for mentoring and nurturing the performance level of the laggards up to the best.

But many organisations in both public and private sectors are being torn apart by the application of market measures to non-markets. The effects are particularly visible in the public sector. 'Pseudo-marketry' of this kind explains why some universities are shutting down even well-respected academic departments which don't make the top research rankings rather than take a rounded view of what they contribute to the institution as a whole, let alone the nation; or in others why departments have to pay to hire the lecture halls or auditoria they teach in.

Pseudo-markets are also the reason why universities have expensive PR departments and why administrators are paid many times more than top academics.

Pseudo-markets destroy co-operation among teachers, schools and hospitals. Particularly in association with targets, their constant companion, they wreak havoc, as Browne suggests, with the professional ethos, turning doctors, local government officers, teachers and police into frustrated box-tickers. A recent survey funded by the Economic and Social Research Council shows that job satisfaction among UK workers is falling because of heavier workloads combined with less work autonomy: exactly the conditions that pseudo-markets create.

Pseudo-markets are what Jane Jacobs in her wonderful book Systems of Survival called 'monstrous hybrids': corruptions and contaminations of two separate logics, getting the worst of each. They are half-baked. As Charles Handy has remarked, markets are a mechanism for sorting the efficient from the inefficient: they don't tell you how people in organisations should behave.

http://observer.guardian.co.uk/business/story/0,,1431325,00.html