Analysts of the economics of the firm find it convenient to assume that the guiding influence on the motivation of the firm is the maximisation of profit. Even those analysts who wish to take account of other influences which reflect the diverse interests of those who manage and own the firm (the shareholders) will still include a profit target of some kind amongst the firm's objectives. It follows that the choice of the kinds and amounts of outputs and inputs, of the prices charged and of the investment undertaken, will depend to a large extent on the profit target. Consequently, a firm will have some incentive to minimise the cost of the inputs sold to them, including the cost of labour, though ‘cost’ must be interpreted to include attention to such factors as the reliability and quality of the supply of inputs. A firm will also prefer a higher to a lower price for its output of goods and services, due allowance being taken of the effect of its pricing policies on the behaviour of actual or potential rival suppliers.
In Module 2, attention was concentrated on the growth in the size of government relative to GDP, and the associated growth in the production of goods and services which are not sold through the market. Accordingly the motive forces governing the ‘output’ of governments must be different from those operating in the private sector.
In major industrial countries, with rare exceptions, over 90 per cent of pupils undergoing primary education attend state schools for which no direct charge is made.
Before attempting to model government behaviour, brief mention should be made of the different economic environment in which government operates:
Government services such as defence, law and order and important social services such as education, are not marketed. Those who are responsible for running such services are not instructed to make a profit, and performance cannot be measured by reference to the criteria which apply in the private sector such as a profit target.
Where government undertakes responsibility for the production of marketable output, as in the case of public corporations, commercial criteria are frequently dominated by other criteria representing a wider view of public policy.
Before nationalisation, the prices of electricity which the British electricity industry charged to pensioners were subsidised by central government, implying that the industry was a suitable vehicle for redistribution of income policies.
If the criteria of performance differ from those found in firms subject to competition in the private sector, there is a presumption that the ‘managers’ of government departments or public corporations will react differently to their counterparts in the private sector. These managers are not, for example, subject to the threat of take-over by other firms or of loss of employment caused by bankruptcy. As the public sector is now such a large segment of the GDP, it is important for business executives to know what the nature and consequences of managerial behaviour in the public sector is likely to be. An examination of such behaviour may offer pointers to the kind of problems that arise in large-scale private enterprises with a strong element of monopoly power which could have similar management problems to large-scale government departments. Furthermore, managerial behaviour in the public sector is bound to influence the way in which transactions between government departments or public corporations and private industry are conducted. This must follow from the simple fact that such a large proportion of private output of goods and services is bought by government departments and public corporations.
As observed in Table 2.2 current expenditure on goods and services by all layers of government in the UK represents over 21.3 per cent of the total net output (GDP) of the UK economy. About 64 per cent of this total represented payments to government employees and about 36 per cent represented direct purchases of goods and services from private sector concerns. Other countries in the EC display similar characteristics.
In Module 6 it was observed how the government as ‘ principal’, tries to induce firms, as ‘agents’ to conform with its purchasing requirements. This module looks more closely at the process of government, and particularly the relationship between the government in the strict sense of the elected body responsible for policy, and government departments responsible for ‘producing’ or ‘delivering’ the services which represent the implementation of that policy. These services are not marketed. The case where governments are responsible for producing marketed output is considered in Module 8.
