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Free to Fail

Creative Destruction Revisited

Hugh van der Mandele and Arjen C. van Witteloostuijn

This challenging book tackles one of the most fundamental questions in economics: Why are commercial organizations more efficient than organizations in the public domain?
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Chapter 12: Why public organizations?

Creative Destruction Revisited

Hugh van der Mandele and Arjen C. van Witteloostuijn


The central question in this book is why, on average, public organizations are much less effective and efficient than private organizations performing the same job. Our central argument is not that the absence of profit motives is key, but rather the poisonous mixture of the ultimately inevitable managerial uncontrollability and the soft constraint. This implies that it is not so much the public status of public organizations that can explain their relative inefficiency and ineffectiveness, but rather their lingering existence in a sheltered corner of society. After all, any organization – whether public or private, and whether profit or non-profit motivated – will ultimately fall victim to irreparable uncontrollability. The point is, though, that public organizations are (much) less likely to suffer from the consequences in the form of economic necrosis or apoptosis than their private counterparts, because the former are much more often protected by soft constraints vis-à-vis the latter. Given the stylized fact that they are much less efficient and effective, which has already been known for centuries, we could expect that the role of public organizations in modern societies would be greatly reduced by now, with a relatively small share of the public sector in the economy. This is not the case at all. Still, as Table 12.1 reveals by providing (limited and extended) public sector employment as a percentage of total employment, a significant number of duties are entrusted to public organizations even in the most capitalist economies.

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