Public Sector Private Sector
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Public Sector Private Sector
21 December 2019 14 May 2019 by Tejvan Pettinger
Tejvan Pettinger studied PPE at LMH, Oxford University. Find out more
Readers Question: Does job creation come from public or private sector?
In former Soviet bloc countries, state employment accounted for 70-90% of employment. In developing countries, such as India and Bangladesh, employment rates are low 4-5% (due to a smaller share of tax revenue and limited government size.
Free market economists argue that the private sector is more suited to job creation because firms respond to consumer preferences and market trends and provide employment in areas of high demand.
Profit Incentive . Private firms have a profit incentive to cut costs and develop products demanded by consumers. In the government sector, this profit motive is often absent. Therefore government bodies have a greater tendency to be overstaffed and inefficient.
Bureaucracy . For political reasons, it is sometimes more difficult to get rid of surplus workers in the public sector than the private sector. Private businessmen donβt have to worry about political popularity and so are more willing to make people redundant if it helps efficiency. The public sector, on the other hand, is more likely to employ surplus workers in unproductive jobs.
Crowding out . If the public sector increases, then this is reducing resources for the private sector. For example, if we raise taxes to increase government spending then this means the private sector has lower resources for private sector investment. Therefore, if government spending can be reduced it will free up resources for more efficient private sector growth and job creation. Though there may be temporary problems from public sector spending cuts, in the long term, it will enable lower taxes and higher private sector investment.
Government spending that discourages productivity.
Some government spending can discourage productivity. For example, welfare benefits can reduce the incentive to work and encourage economic inactivity. Reducing welfare benefits (e.g. making it more difficult to claim sickness/unemployment benefits may encourage people to get a work and become economically active. (though it may conflict with goals of equity)
The private sector is very unlikely to provide public goods because of the free-rider problem. Therefore, the government needs to provide nearly all goods with the characteristics of public goods. This includes street cleaning, military, police and the judicial system.
Merit goods and positive externalities
Goods with positive externalities will be under-consumed in a free market. For example, education and training could be provided in the free market, but generally there is under-consumption of the socially optimal level because private firms ignore positive externalities. Therefore, the government needs to intervene in public services such as health and education. By providing good quality training schemes, the government can help increase labour productivity and provide private firms with educated workers.
The same argument applies to investment in infrastructure. e.g. New train links, and roads.
Private sector jobs are more volatile with regard to the economic cycle. In a recession, we can see a sharp fall in private sector employment as firms cut back on labour. In a recession, public sector jobs act as a stabiliser β limiting the rise in unemployment. J.M. Keynes argued that in a severe recession, the government should intervene and create more employment. For example, public works scheme such as the New Deal of the 1930s.
If the economy is at full employment and growing strongly, higher government borrowing and spending will cause crowding out. However, in a recession, there may be a sharp rise in consumer saving. This leads to a fall in spending and spare capacity. In this situation, an increase in government spending financed by government borrowing doesnβt cause crowding out because the government is using private sector savings that would otherwise remain idle.
Both the public and private sector have a role to play. For general businesses without externalities, the private sector is likely to be more efficient and better at job creation. Reducing the scope of government spending could create more private sector opportunities for investment and job creation.
However, the private sector also needs a good public sector to provide, education, healthcare and infrastructure investment. Also, the private sector needs a stable macro-economy which the government has a role to provide. In a prolonged recession, the case for government intervention to create jobs is much stronger than when the economy is growing strongly.
This is basic economics well illystrated.
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From Wikipedia, the free encyclopedia
^ "public sector" . Investorwords , WebFinance, Inc. 2016.
^ "The Center for Responsive Politics." OpenSecrets.org. Center for Responsive Politics, 16 May 2017. Web. 11 June 2017.
^ Rothbard, M. N. (1961). The fallacy of the βpublic sector.β. The Logic Of Action Two, Application and Criticism from the Austrian School.
^ ibid
^ Murray N. Rothbard (May 1998). "The Moral Status of Relations to the State", chapter 24 of The Ethics of Liberty. Humanities Press 1982, New York University Press 1998. ISBN Β 978-0-8147-7506-6 .
^ Ellickson, R. C. (2017). A Hayekian Case Against Anarcho-Capitalism: Of Street Grids, Lighthouses, and Aid to the Destitute. NYUJL & Liberty, 11, 371.
The public sector (also called the state sector ) is the part of the economy composed of both public services and public enterprises .
Public sectors include public goods and governmental services such as the military , law enforcement , infrastructure ( public roads , bridges , tunnels , water supply , sewers , electrical grids , telecommunications , etc.), public transit , public education , along with health care and those working for the government itself, such as elected officials . The public sector might provide services that a non-payer cannot be excluded from (such as street lighting), services which benefit all of society rather than just the individual who uses the service. [1] Public enterprises, or state-owned enterprises, are self-financing commercial enterprises that are under public ownership which provide various private goods and services for sale and usually operate on a commercial basis.
Organizations that are not part of the public sector are either a part of the private sector or voluntary sector . The private sector is composed of the economic sectors that are intended to earn a profit for the owners of the enterprise. The voluntary, civic or social sector concerns a diverse array of non-profit organizations emphasizing civil society .
The organization of the public sector can take several forms, including:
Libertarian and Austrian economists have criticized the idea of public sector provision of goods and services as inherently inefficient. [3]
"Any reduction of the public sector, any shift of activities from the public to the private sphere, is a net moral and economic gain."-Murray Rothbard, The Fallacy of the Public Sector [4]
Libertarians and anarcho-capitalists have also argued that the system by which the public sector is funded, namely taxation, is itself coercive and unjust . [5] However, even notable small-government proponents have pushed back on this point of view, citing the ultimate necessity of a public sector for provision of certain services, such as national defense, public works and utilities, and pollution controls. [6]
Quaternary sector : information services Quinary sector : human services
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