Bill Gates, Microsoft founder and billionaire philanthropist, would have us believe that the government is far superior to the private sector in allocating resources towards the social interest.
“Yes, the government will be somewhat inept,” Gates says in the November issue of The Atlantic, “but the private sector is in general inept. How many companies do venture capitalists invest in that go poorly? By far most of them.”
But the facts are clear. The opposite is true. As Deloitte analysts have explained, between 1987 and 2011, private sector productivity increased by 50 percent. In contrast, public sector productivity actually declined.
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The explanation for this divergence is fairly simple. Operating in a dynamic environment of constant competition, private sector organizations must minimize costs, while maximizing efficiencies and revenues. And if they fail to do so, the market will simply re-allocate resources elsewhere — forcing their closure.
But for the vast majority of government agencies, competition is absent. Existing as effective monopolies in their provision of service, government organizations can de-prioritize efficiencies as irrelevant. Indeed, the utter lack of interest in productivity is actually encouraged by government labor structures. Consider that while a private-sector employee would be rewarded for productive contributions to his firm’s balance sheet, government interests are defined by bureaucratic interests. Many government managers would prefer that their staff served the status quo. This “don’t rock the boat” attitude is further multiplied by top-heavy bureaucratic structures uncomfortable with change. The major point here is that when a manager isn’t competing with a different company, as is the case in government, he or she has a lower personal stake in maximizing productivity from junior staff.
We don’t need statistics to point out this obvious truth. As a former waiter in the D.C. area, I can attest that government workers are by far the most likely to take longer lunches and arrive for earlier happy hours! This is not to say that government service deserves our scorn as a rule. Of course not. As anyone who lives in Washington, D.C., can attest, many of those in the intelligence community, the State Department, or specialized positions in the military, are highly skilled people who could easily earn far more in the private sector. Their service to the nation deserves our gratitude, as does the service of those who risk danger for the public good.
Nevertheless, at the broader margin that Bill Gates refers to — whether the productive benefits of the private sector outweigh those of the public sector — there really is no debate.
Gates would have us believe that private sector success is a rarity compared to government success. He uses Microsoft to make this argument: “… it’s just that every once in a while a Google or a Microsoft comes out, and some medium-scale successes too, and so the overall return is there, and so people keep giving them money.” But if it is really the case that Microsoft and other corporations are the exceptions to the rule, why do private investors chose to invest? And if expansive government were truly the best means of joined economic-social benefit, why do so many business owners align with conservative economic ideology?
If “the private sector is in general inept,” as Gates contends, then there is only one explanation for those millions of Americans who maintain businesses year after year against competitive risk: these individuals must have a fetish for economic pain.
Of course, the opposite is true: business owners choose risk because the risk is worth it. At the societal level, their capitalist choice is endorsed by the public interest: the ride-sharing industry offers a great example of public preferences towards capitalism over government regulation.
Yet it’s also worth considering the alternatives to America’s capitalist allocation model that Gates presumably favors. Those alternatives aren’t great. At one end of the spectrum are the pure-socialist failed states like Venezuela. At the other end are social-democratic models such as the EU-state model or the Chicago model. The underlying truth: socialist management leads to government ineptitude, economic failure and human misery.
Government has a role in promoting research in some limited specific areas. But at the margin of ultimate social outcomes, there is no contest between private resource allocation and government resource allocation. That’s because here private sector allocations are made in the dynamic pursuit of common interests; government allocations are disconnected from the need for measurable outcomes.