It is curious that in an article about the distorting effect of incentives, you say this, "You might object that such contracting out will improve the public services. I’ve no strong view on this: transactions cost economics is all about detail and context." But surely in most examples of contracted out public services the incentive for the provider is not to provide a good service - because that is too vague and difficult to measure - but rather to meet some simplistic targets which they can game - and always do.
I was once an information analyst in the NHS and the biggest problem we had was measuring what mattered most to patients - outcomes. We could provide endless statistics on referrals, length of stay, numbers of operations, time on waiting lists, number of day cases vs in-patient etc. etc. But, none of this told us whether after all the waiting, referrals, more waiting, operation and time in hospital, the outcome was positive for the patient. As in, they got better, or recovered from their ailment or problem. We could only indirectly get some indication by whether they had to come back within the next few months. So what really matters in a health system was more or less guess work, at least statistically speaking.
When contracting out such services they will set targets for time waiting, number of operations, and length of stay (or proportion of day cases) but there won't be targets for outcomes. This pattern is typical across services, because complex services involve interactions with people in circumstances that vary widely. There is no easy binary to count. Instead they look for things that are easy to count, and set these as targets. But these may have only a tangential relevance to what really matters to the service user.
The result is that the providers focus entirely on meeting the target, and not at all on delivering a good (as in, positive outcomes for the customers) service. The problem is compounded because the contract is between the provider and the so called purchaser, who is NOT the customer. Which automatically interrupts the feedback loop of buyer/seller that neoclassical economics so lauds.
I can say fairly categorically that in the Public Sector contracting out does NOT improve services. Nor is it really expected to. The real driver is fixing costs and defining budgets - preferably ones that get special funding. It rarely even saves money, because the providers quickly learn how to game it to extract the maximum, and often find they have the purchasers at a disadvantage because of the targets and the lack of direct interface between the paying customers (the government department or quango) and the actual service deliverers (who may even be contracters of a sub-contracted group, not even the of the original providers holding the contract). As it is all budget driven, should costs go up, the service will be squeezed, meaning the front-line staff and customers - but at least the blame is spread and so more easily dodged.
And of course incentives change over time, but not necessarily for the better. Take the kinds of people who get senior positions at the BBC, for example (forgive the crude generalisation but you'll recognise what I mean). Before 2016 they were generally deferential to the Tories but regarded the far right with contempt as a minority of clowns or thugs who could safely be ignored or, in the case of Farage, indulged as a comedy act. The Brexit referendum changed that: these people woke up to the unpleasant reality that the far right can wield electoral power and they've been in hard compensation mode ever since. They have a strong incentive to do so because they know in the shallows of their souls that a government of the far right would sack some of them and force the rest to conceal the airy social liberalism which they regard as part of their identities. They will continue to be dismissive of the Greens and other leftwing parties until such time as those parties approach power, at which point their incentive will be to suddenly discover that maybe some leftwing policies are not so bad after all.
Incentives seem to have been pretty good in the earlier half of the 20th century, so one should ask why they were then but not now. There is apparently no natural necessity about it.
Personally I think there is something in Colin Crouch's idea about the post-democratic state: the trade unions were the repository of popular power. When industry was outsourced the trade unions lost power and organized democracy died. What is left is only occasional outbursts without consistency.
Democracy has to be organized in long-lived popular movements with an internal popular movement culture, it's only then bad ideas can be weeded out by experience. The labour movement was good at that up to the 1960s, but it was probably enfeebled long before the outsourcing wave because its best talents tended to be co-opted by the state and cut of from their bases.
Nevertheless, some substitute should be imagined, otherwise the bad incentives will continue for ever.
«Colin Crouch's idea about the post-democratic state: the trade unions were the repository of popular power. When industry was outsourced the trade unions lost power and organized democracy died.»
Anti-union consultants told the ruling/business class that high-capital intensity manufacturing industries were too easily "infected" by labor unions and that drove a lot of offshoring decisions.
But a large part of the story is also that thanks to labor unions and labor parties winning good wages, good pensions, cheap housing many unions members and union and party officials became "petty bourgeoisie" and therefore thatcherite and started voting for lower wages and lower pensions for everybody else and higher housing prices and rents for themselves.
It's outside politics, but perhaps the most obvious example of the "not incentivised to solve the client's problem" problem in modern life are dating apps. They don't want you to find a long-term partner - they want you to remain single so you keep using the app!
I'm not sure that "parties that successfully remove the problems of their client group [...] also remove the reason for that group to vote for them" is some law-like universal phenomenon. The Swedish Social Democratic Party made Sweden into the most social democratic country in world history, and won thirteen elections in a row while doing so.
Indeed sometimes the beneficiaries want to keep getting the same benefits or are wary of changing a winning team.
But not that when the swedish working class thanks to social-democracy realized that they had turned into middle-class investors they eventually switched to thatcherite politics.
When politics achieve social engineering and change the interests of large groups of voters then these voters switch,
Many social-democratic parties have had the following dilemma:
#1 Continue to represent working-class interests and leave behind their enriched current constituency.
#2 Continue to represent their enriched current constituency and leave behind working-class interests.
Many, many such parties chose option #2 also in large part because their leaders and officials had become themselves thatcherites, and then ended up PASOKified (because their enriched constituency kept switching to longer-established and "purer" thatcherite parties and their remaining working-class voters chose to abstain).
Tony Blair: «I was canvassing in the Midlands on an ordinary suburban estate. I met a man polishing his Ford Sierra, self-employed electrician, Dad always voted Labour. He used to vote Labour, he said, but he bought his own home, he had set up his own business, he was doing quite nicely, so he said I’ve become a Tory.»
«a 79-year-old retired carpenter in Cornwall, who bought his council house in Devon in the early 80s for £17,000. When it was valued at £80,000 in 1989, he sold up and used the equity to put towards a £135,000 fisherman’s cottage in St Mawes. Now it’s valued at £1.1m. “I was very grateful to Margaret Thatcher,” he said.»
“The UK body directly tasked with protecting us from such predation is the CMA, which for years was regarded as one of the world’s smartest and bravest regulators against market power. [...] But this government has become captive to the opposite idea. On Tuesday it sacked the CMA’s chair, Marcus Bokkerink, after complaints from big-business lobbies – and instead appointed Doug Gurr, a former country manager of Amazon UK and president of Amazon China. Then on Thursday, news emerged that the CMA was cutting 100 staff. This followed Keir Starmer’s veiled threat at an investment summit in October, when, in a hall full of US big tech officials, he warned that the CMA should “take growth as seriously as this room does” – implying that it should treat tech giants with kid gloves. Then, he appointed Clare Barclay, a top Microsoft official, to chair the Industrial Strategy Advisory Council.”
That to me seems prompt, efficient actions quite sensitive to the interests of important stakeholders :-).
Thanks for that link and it is a great post, But it shows that many people closely follow politics and pursues their incentives and this has benefited them a lot.
Politics is not about philosopher-kings pursuing whatever they deem the imaginary "public good" to be (as out schoolteacherly blogger seems to argue) but about ensuring that the interests of the majority (or plurality) get pursued at the expense of the minority.
In democratic elections one side wins and the other sides lose. That is how democracy is supposed to work.
«Those Brexiters who claimed that Brexit would allow us to better control immigration have also been proven wrong: net immigration rose sharply after leaving the EU.»
Another aspect of this hallucination is that the governments after 2016 have used their control of immigration to dramatically alter the mix of immigrants reducing a lot the immigration of white europeans expecting high wages because of "white supremacism" and ensuring that a large majority of immigrants currently are "people of global majority" expecting much more competitive wages; and also moving the segregationist racial mix in the UK closer to the global labor market one.
“from 2010 to 2019, major immigration to the UK came from the European Union. After Brexit, EU immigration to the UK declined. In 2022, Chart 3 indicates a shift – out of 1.3 million visas, only 47,000 went to EU nationals.”
“EU net migration rose gradually to a peak of around 322,000 in the year ending June 2016, before falling steadily and becoming negative (more people leaving than arriving) in 2022.”
“One of the biggest names in European private equity said that Brexit will be good for his business, but will mean a 30% wage reduction for UK workers. [...] He added that EU immigration will be replaced with workers from the Indian subcontinent and Africa, willing to accept "substantially" lower pay.”
Sometimes I read in this blog claims that to me seem pure hallucinations most obviously this;
The worst hallucination is here:
«Those Brexiters who claimed that Brexit would allow us to better control immigration have also been proven wrong: net immigration rose sharply after leaving the EU.»
Actually whatever the merits of brexit it had indeed allowed to *control* immigration and both ways: the surge in immigration was a deliberate policy to "moderate" wage inflation after COBID-19 and now the squeeze of immigration by the Starmer government is also deliberate policy and would not have been possible without brexit:
“Analysis of Home Office quarterly datasets reveals the number of overseas nurses granted entry to the UK has fallen by 93% over three years. Just 1,777 overseas nurses were granted entry in 2025, compared with 26,100 in 2022. Visas for workers in the caring personal service occupations category [...] fell from 107,847 workers granted entry in 2023 to just 3,178 in 2025, a 97% decline over two years. Only 23 overseas care workers were granted entry in October-December 2025.”
Other fantasies:
«We’ve seen the outcome, so what are the incentives? The outcome, we know, is bad.»
For whom? Since Thatcher and Blair most of the the middle and upper classes (who have control of politics) have enjoyed massive increases in their wealth and incomes (redistributed from the lower classes) almost every years thanks to booming incomes from ownership of property and businesses. This for them is a very good outcome, pursued successfully for decades by acting very determinedly on their incentives.
«Let’s start with voters. These have no incentive to learn about politics because of the well=known problem of collective action.»
In my experience most middle-class and upper-class voters have a strong interest in learning about politics and are involved in politics very closely monitoring how well their investments doing (sometimes obsessively) and many are involved in sponsoring or organizing lobbying as NIMBYs or bosses when they do not get what they want and have accordingly reaped the benefits.
Perhaps the lower classes have been shafted and they have given up on politics as no major party bothers or dares to represent them, but our blogger is making fantastically general claims,
It is curious that in an article about the distorting effect of incentives, you say this, "You might object that such contracting out will improve the public services. I’ve no strong view on this: transactions cost economics is all about detail and context." But surely in most examples of contracted out public services the incentive for the provider is not to provide a good service - because that is too vague and difficult to measure - but rather to meet some simplistic targets which they can game - and always do.
I was once an information analyst in the NHS and the biggest problem we had was measuring what mattered most to patients - outcomes. We could provide endless statistics on referrals, length of stay, numbers of operations, time on waiting lists, number of day cases vs in-patient etc. etc. But, none of this told us whether after all the waiting, referrals, more waiting, operation and time in hospital, the outcome was positive for the patient. As in, they got better, or recovered from their ailment or problem. We could only indirectly get some indication by whether they had to come back within the next few months. So what really matters in a health system was more or less guess work, at least statistically speaking.
When contracting out such services they will set targets for time waiting, number of operations, and length of stay (or proportion of day cases) but there won't be targets for outcomes. This pattern is typical across services, because complex services involve interactions with people in circumstances that vary widely. There is no easy binary to count. Instead they look for things that are easy to count, and set these as targets. But these may have only a tangential relevance to what really matters to the service user.
The result is that the providers focus entirely on meeting the target, and not at all on delivering a good (as in, positive outcomes for the customers) service. The problem is compounded because the contract is between the provider and the so called purchaser, who is NOT the customer. Which automatically interrupts the feedback loop of buyer/seller that neoclassical economics so lauds.
I can say fairly categorically that in the Public Sector contracting out does NOT improve services. Nor is it really expected to. The real driver is fixing costs and defining budgets - preferably ones that get special funding. It rarely even saves money, because the providers quickly learn how to game it to extract the maximum, and often find they have the purchasers at a disadvantage because of the targets and the lack of direct interface between the paying customers (the government department or quango) and the actual service deliverers (who may even be contracters of a sub-contracted group, not even the of the original providers holding the contract). As it is all budget driven, should costs go up, the service will be squeezed, meaning the front-line staff and customers - but at least the blame is spread and so more easily dodged.
Thoughtful and well researched article, gives me plenty with which to educate people. Thanks
And of course incentives change over time, but not necessarily for the better. Take the kinds of people who get senior positions at the BBC, for example (forgive the crude generalisation but you'll recognise what I mean). Before 2016 they were generally deferential to the Tories but regarded the far right with contempt as a minority of clowns or thugs who could safely be ignored or, in the case of Farage, indulged as a comedy act. The Brexit referendum changed that: these people woke up to the unpleasant reality that the far right can wield electoral power and they've been in hard compensation mode ever since. They have a strong incentive to do so because they know in the shallows of their souls that a government of the far right would sack some of them and force the rest to conceal the airy social liberalism which they regard as part of their identities. They will continue to be dismissive of the Greens and other leftwing parties until such time as those parties approach power, at which point their incentive will be to suddenly discover that maybe some leftwing policies are not so bad after all.
Incentives seem to have been pretty good in the earlier half of the 20th century, so one should ask why they were then but not now. There is apparently no natural necessity about it.
Personally I think there is something in Colin Crouch's idea about the post-democratic state: the trade unions were the repository of popular power. When industry was outsourced the trade unions lost power and organized democracy died. What is left is only occasional outbursts without consistency.
Democracy has to be organized in long-lived popular movements with an internal popular movement culture, it's only then bad ideas can be weeded out by experience. The labour movement was good at that up to the 1960s, but it was probably enfeebled long before the outsourcing wave because its best talents tended to be co-opted by the state and cut of from their bases.
Nevertheless, some substitute should be imagined, otherwise the bad incentives will continue for ever.
«Colin Crouch's idea about the post-democratic state: the trade unions were the repository of popular power. When industry was outsourced the trade unions lost power and organized democracy died.»
Anti-union consultants told the ruling/business class that high-capital intensity manufacturing industries were too easily "infected" by labor unions and that drove a lot of offshoring decisions.
But a large part of the story is also that thanks to labor unions and labor parties winning good wages, good pensions, cheap housing many unions members and union and party officials became "petty bourgeoisie" and therefore thatcherite and started voting for lower wages and lower pensions for everybody else and higher housing prices and rents for themselves.
It's outside politics, but perhaps the most obvious example of the "not incentivised to solve the client's problem" problem in modern life are dating apps. They don't want you to find a long-term partner - they want you to remain single so you keep using the app!
I'm not sure that "parties that successfully remove the problems of their client group [...] also remove the reason for that group to vote for them" is some law-like universal phenomenon. The Swedish Social Democratic Party made Sweden into the most social democratic country in world history, and won thirteen elections in a row while doing so.
Indeed sometimes the beneficiaries want to keep getting the same benefits or are wary of changing a winning team.
But not that when the swedish working class thanks to social-democracy realized that they had turned into middle-class investors they eventually switched to thatcherite politics.
When politics achieve social engineering and change the interests of large groups of voters then these voters switch,
Many social-democratic parties have had the following dilemma:
#1 Continue to represent working-class interests and leave behind their enriched current constituency.
#2 Continue to represent their enriched current constituency and leave behind working-class interests.
Many, many such parties chose option #2 also in large part because their leaders and officials had become themselves thatcherites, and then ended up PASOKified (because their enriched constituency kept switching to longer-established and "purer" thatcherite parties and their remaining working-class voters chose to abstain).
http://www.britishpoliticalspeech.org/speech-archive.htm?speech=202
Tony Blair: «I was canvassing in the Midlands on an ordinary suburban estate. I met a man polishing his Ford Sierra, self-employed electrician, Dad always voted Labour. He used to vote Labour, he said, but he bought his own home, he had set up his own business, he was doing quite nicely, so he said I’ve become a Tory.»
https://www.theguardian.com/society/2022/jun/29/how-right-to-buy-ruined-british-housing
«a 79-year-old retired carpenter in Cornwall, who bought his council house in Devon in the early 80s for £17,000. When it was valued at £80,000 in 1989, he sold up and used the equity to put towards a £135,000 fisherman’s cottage in St Mawes. Now it’s valued at £1.1m. “I was very grateful to Margaret Thatcher,” he said.»
Regulation of sensitive areas — monopolies and the media (including social media) — needs to be effective and efficient. Currently neither.
«Regulation of sensitive areas — monopolies and the media (including social media) — needs to be effective and efficient.»
For whom? Currently it seems indeed to me to be very “very sensitive and efficient” to the interests of investors, for example:
https://www.theguardian.com/commentisfree/2025/jan/25/labours-decision-to-muzzle-regulators-in-the-name-of-growth-will-backfire-horribly
“The UK body directly tasked with protecting us from such predation is the CMA, which for years was regarded as one of the world’s smartest and bravest regulators against market power. [...] But this government has become captive to the opposite idea. On Tuesday it sacked the CMA’s chair, Marcus Bokkerink, after complaints from big-business lobbies – and instead appointed Doug Gurr, a former country manager of Amazon UK and president of Amazon China. Then on Thursday, news emerged that the CMA was cutting 100 staff. This followed Keir Starmer’s veiled threat at an investment summit in October, when, in a hall full of US big tech officials, he warned that the CMA should “take growth as seriously as this room does” – implying that it should treat tech giants with kid gloves. Then, he appointed Clare Barclay, a top Microsoft official, to chair the Industrial Strategy Advisory Council.”
That to me seems prompt, efficient actions quite sensitive to the interests of important stakeholders :-).
There’s a lot of it about
https://hollisrobbinsanecdotal.substack.com/p/attention-is-all-you-need-to-bankrupt?r=1nzjdb&utm_medium=ios
Thanks for that link and it is a great post, But it shows that many people closely follow politics and pursues their incentives and this has benefited them a lot.
Politics is not about philosopher-kings pursuing whatever they deem the imaginary "public good" to be (as out schoolteacherly blogger seems to argue) but about ensuring that the interests of the majority (or plurality) get pursued at the expense of the minority.
In democratic elections one side wins and the other sides lose. That is how democracy is supposed to work.
«Those Brexiters who claimed that Brexit would allow us to better control immigration have also been proven wrong: net immigration rose sharply after leaving the EU.»
Another aspect of this hallucination is that the governments after 2016 have used their control of immigration to dramatically alter the mix of immigrants reducing a lot the immigration of white europeans expecting high wages because of "white supremacism" and ensuring that a large majority of immigrants currently are "people of global majority" expecting much more competitive wages; and also moving the segregationist racial mix in the UK closer to the global labor market one.
https://www.migrationwatchuk.org/migration-statistics-over-time
“from 2010 to 2019, major immigration to the UK came from the European Union. After Brexit, EU immigration to the UK declined. In 2022, Chart 3 indicates a shift – out of 1.3 million visas, only 47,000 went to EU nationals.”
https://researchbriefings.files.parliament.uk/documents/SN06077/SN06077.pdf
“EU net migration rose gradually to a peak of around 322,000 in the year ending June 2016, before falling steadily and becoming negative (more people leaving than arriving) in 2022.”
https://www.ibtimes.co.uk/buyout-boss-says-brexit-will-be-good-his-business-will-mean-30-cut-uk-wages-1602631
“One of the biggest names in European private equity said that Brexit will be good for his business, but will mean a 30% wage reduction for UK workers. [...] He added that EU immigration will be replaced with workers from the Indian subcontinent and Africa, willing to accept "substantially" lower pay.”
Sometimes I read in this blog claims that to me seem pure hallucinations most obviously this;
The worst hallucination is here:
«Those Brexiters who claimed that Brexit would allow us to better control immigration have also been proven wrong: net immigration rose sharply after leaving the EU.»
Actually whatever the merits of brexit it had indeed allowed to *control* immigration and both ways: the surge in immigration was a deliberate policy to "moderate" wage inflation after COBID-19 and now the squeeze of immigration by the Starmer government is also deliberate policy and would not have been possible without brexit:
https://www.theguardian.com/society/2026/feb/26/drop-in-overseas-workers-uk-hospitals-and-care-homes:
“Analysis of Home Office quarterly datasets reveals the number of overseas nurses granted entry to the UK has fallen by 93% over three years. Just 1,777 overseas nurses were granted entry in 2025, compared with 26,100 in 2022. Visas for workers in the caring personal service occupations category [...] fell from 107,847 workers granted entry in 2023 to just 3,178 in 2025, a 97% decline over two years. Only 23 overseas care workers were granted entry in October-December 2025.”
Other fantasies:
«We’ve seen the outcome, so what are the incentives? The outcome, we know, is bad.»
For whom? Since Thatcher and Blair most of the the middle and upper classes (who have control of politics) have enjoyed massive increases in their wealth and incomes (redistributed from the lower classes) almost every years thanks to booming incomes from ownership of property and businesses. This for them is a very good outcome, pursued successfully for decades by acting very determinedly on their incentives.
«Let’s start with voters. These have no incentive to learn about politics because of the well=known problem of collective action.»
In my experience most middle-class and upper-class voters have a strong interest in learning about politics and are involved in politics very closely monitoring how well their investments doing (sometimes obsessively) and many are involved in sponsoring or organizing lobbying as NIMBYs or bosses when they do not get what they want and have accordingly reaped the benefits.
Perhaps the lower classes have been shafted and they have given up on politics as no major party bothers or dares to represent them, but our blogger is making fantastically general claims,