I recently reread two really good pieces on different roles the government should take in helping flailing industries. One was the last chapter of Clay Christensen et al.’s The Innovator’s Prescription, and the other was Atul Gawande’s Testing, Testing. Plus, I have my own addition. (Bear in mind, this all relates to established industries, so I won’t mention the additional subsidizing roles the government could take in helping the foundation of industries.)
Christensen et al. tell multiple stories that are all pretty similar to each other, but here’s a typical one: the government sees that mainframe computers are really expensive and that IBM has a near monopoly on them, so, using the “increase competition, lower prices” dogma, it spends tons of money trying to break up IBM. Meanwhile, new innovative companies come along and meet the same computing needs of consumers with way cheaper micro-processor-based computers, lowering prices for computing way more than competition amongst a bunch of broken up IBM competitors could ever have. Moral of the story #1: instead of worrying so much about monopolies and other limitations on sustaining competition, the government should be more focused on identifying and eliminating regulatory barriers to disruptive innovators. This is when you should think about barriers such as against the building of specialty hospitals, certain prescription-writing privileges for physician extenders, and the licensing of dental health aide therapists for serving rural areas.
Gawande talks about the agricultural industry and how it was revolutionized into a much more efficient industry through a government program (that started out as just another pilot program) that eventually placed government-employed farming consultants in nearly every county. The role of the consultants was to continually provide to the local farmers information about the state-of-the-art methods for growing the best and most abundant crops. For some reason, the invisible hand of competition wasn’t enough to convince farmers to use new farming techniques. Moral of the story #2: if competitors don’t have access to information that can help them improve value, or if the implementation of such information is above their ability/willingness to try, the government can help information flow and help competitors implement that information, possibly by providing subsidies that take away the downside risk of implementation or by teaching how others are doing it.
And here’s my addition: before we can start worrying about removing regulatory barriers or helping information flow and implementation, we need to remember that the goal of all this is to improve the value of the industry, and then we need to make sure financial incentives are aligned with what we value. What I mean is, without the financial incentives to develop a cheaper version of a mainframe computer, it would have taken a lot longer to come about; without the financial incentives for farmers to use new techniques to grow and sell more crops, they would have been even more hesitant to try the new ideas out. Moral of the story #3: until financial incentives are aligned with value, anything else the government does to try to help low-value industries improve (including the first two morals of the stories) will be severely limited in efficacy. I can’t think of another privatized industry in history where financial incentives haven’t been aligned with value, so I think this point isn’t as obvious to people.
Is this list exhaustive? Honestly, I don’t know. I guess the question I need to be able to answer is, Are there other causes of competition failing? I can’t think of any others, but I’m not enough of a markets historian.
Also, this post obviously doesn’t explain exactly why I think financial incentives aren’t aligned with value in healthcare, but that’s what I’ve spent the last month writing a perspective article about (thus, the long time since my last post), and the ideas will make it to my blog hopefully soon.
Clear Thinking on Healthcare 
You mentioned that you were looking for a privatized industry where financial incentives weren’t properly aligned with value. I thought of an example that could be an interesting case study on this concept. The federal government’s dealing in public vs. private education. The public school system is a MESS, and the federal government has been trying for years to clean it up (i.e., helping the currently low value public education industry improve has been severely limited in efficacy). The education system as a whole is essentially a public / private hybrid. And much of today’s literature about how to improve education surrounds the use of education “vouchers”, which are basically the same concept as a government subsidy, so that people can take the voucher / subsidy money and go to a school of their own choice. The schools that do a good job would be in higher demand and make more money. The schools that do a bad job (i.e., inner city Chicago schools) would basically be forced to do one of two things: either improve their teaching to the point that a sustainable portion of their enrollment is satisfied enough to stay, or close up shop. This would shift education industry capital towards schools that do a good job (as opposed to just pushing capital to schools in geographic areas where students have high test scores). This concept sounds similar to something I believe you and I discussed the other day: basically that organizations don’t usually change unless the alternative option is one that could seriously harm to the organization. Bottom line: organizations gotta have a fire lit under their seats if they’re gunna make any kind of serious changes!
Very interesting! Are financial incentives aligned with value in the privatized side of education? Based on my understanding of what causes financial incentives to be aligned, I’d say they mostly are. Quality information may be a little lacking, so maybe they’re not perfectly aligned, but all the pieces seem to be in place for the public sector to really improve value and be financially rewarded for it, especially if vouchers become more prevalent.
Maybe this would result in more and more kids getting sent to private schools, and the mess that’s going on in the public schools would slowly go away as fewer and fewer kids get sent to them, making the whole public school system slowly go away. I guess as long as underprivileged kids still get appropriate access to education, it might not be such a bad thing.