First-Best-World Economic Theory and the Second-Best-World of Public Sector Outsourcing: The Reinvention of the Soviet Kombinat by Other Means

Abstract

This paper examines how public sector outsourcing has performed in the UK, one of its leading exponents. It sets out the theoretical economic logic behind it, the unanticipated risks in its conception, and the deepening problems with its intensification. It shows how, when we put the market rhetoric of New Public Management to one side, outsourcing necessitates the central planning of private actors, and how the success of this venture hinges on the viability of the outsourcing contract as a fully effective junction of instruction and control. As contract theory tells us, however, the more complex and dynamic the good, the less a contract can guarantee effective control over its production. Moreover, as the critical economics of Soviet central planning teaches us, the resulting asymmetries in information and leverage are just the start of bargaining games that the state (and taxpayer) cannot win. As the paper shows, a state that outsources its complex tasks puts itself at a chronic informational disadvantage, renders itself dependent on poorly controlled private monopoly service providers for essential services that form part of a matrix of interdependent services, and cannot exit failing contracts under acceptable terms. In the USSR a remarkably isomorphic set of hazards had driven Nikita Khrushchev back to the drawing board by 1965.