Some Quotes from "Free to Choose" on Government Efficiency

With the rise of DOGE, there is an active debate concerning how efficient the government is in producing goods and services. When the Federal Government spends $1 million more on national defense or when a City such as Baltimore spends $1 million more on the police department, how much extra safety is produced? How do the Pentagon or the Baltimore Police Department choose to allocate those funds?

In both the case of the Pentagon and the Baltimore Police Department case, the taxpayers do not know how these organizations operate. What goes on within such “black boxes”?

Economists have studied the private sector before. In the late 1990s, economists at the NBER visited factories and met with managers to learn how actual firms organized their production and made decisions regarding how to produce output. This was called the NBER Pin Factory Initiative.

In 2025, we need the Federal and Local DOGE to explore the same issue for different levels of government. Government agencies are tasked with providing street safety, national security, and K-12 public education. How do these entities optimize? How do they decide how to spend money across labor and capital? Do they encourage experimentation to accelerate learning? What new strategies might be cost-effective? How do they identify excellent employees and promote them?

Here are three quotes from Free to Choose that speak to the incentives in public school districts.

“The difference is not between schooling and other activities, but between arrangements under which the consumer is free to choose and arrangements under which the producer is in the saddle, so the consumer has little to say. If the consumer is free to choose, an enterprise can grow in size only if it produces an item that the consumer prefers because of its quality or price. And size alone will not enable any enterprise to impose a product on the consumer that the consumer does not consider is worth its price.” (page 156)

“In schooling, the parents and child are the consumers, the teacher and school administrators, the producers. Centralization in schooling has meant larger units, a reduction in the ability of consumers to choose, and an increase in the power of producers. Teachers, administrators, and union officials are no different from the rest of us. They may be parents, too, sincerely desiring a fine school system. However, their interests as teachers, administrators, and union officials differ from their interests as parents and the interests of the parents whose children they teach. Their interest may be served by greater centralization and bureaucratization even if the interests of the parents are not; indeed, one way in which those interests are served is precisely by reducing the power of parents.” (page 157)

For-profit firms face competitive pressures to supply goods that people want at reasonably low prices. Such firms will lose customers if they fail to do so. The Public Sector faces much less competitive pressure here. If crime goes up in a city, more police are hired! Government organizations face challenges grading employees and having clear performance criteria for judging which employees are under-performing. Public sector unions protect these workers. Union-mandated pay compression limits the ability of the public sector to pay superstars the wages they require to continue to work for the enterprise. Managers who efficiently run their public sector division are unlikely to receive a pay hike for their cost-effectiveness. In sum, the incentives within the organization do not appear to reward experimentation. In contrast, the private sector features activist shareholders and price-sensitive customers always looking around for a better deal.