The balancing act between the market and bureaucracy

The modernization of government demands quite a balancing act from policy makers. The market and bureaucracy are becoming ever more intertwined, but what is the optimal mix of price incentives and formal rules? As soon as self-steering and personal accountability increase in importance, the role played by trust also increases, states Dr. Ferry Koster, extraordinary professor of Innovative Cooperation at TIAS.

Decentralization, privatization and the transition to a participative society has consequences for the cooperation between the parties concerned, whether in care, on the labor market or in education. On the one hand there is a greater need for cooperation, on the other hand the manner of steering that cooperation is becoming ever more complex.

A balancing act

Once all services have been fully privatized, the pricing mechanism can start to function. If these are produced entirely through government, then bureaucratic mechanisms will work. Both mechanisms have advantages and disadvantages. While under certain circumstances the market mechanism creates efficiency, markets can also fail. On the other hand, bureaucracies can resist market failure, but can also create inefficiencies.

As long as just one of the mechanisms is employed, the situation is relatively simple. When privatizing, ensure that market mechanisms can do their work. If the service is produced by government, then ensure that proper regulations are in place.

In practice, there is usually a combination of market and bureaucracy. This demands quite a balancing act from policy makers. They attempt to answer the question: what is the optimal mix of price incentives and formal rules? The modernization of government will make even more demands on that balancing act, and for various reasons.

Networks and trust

To start with, it will become apparent that assuming two options - market and bureaucracy - will not suffice. As soon as more emphasis is given to self-steering and personal responsibility, a third mechanism will come into play. That mechanism is embedded in the informal relationships between parties and is designated trust. That steering mechanism works when the cooperation between parties is founded on social standards.

So as soon as there is less central steering, privatization is not the only option for establishing cooperation. Those combinations can also function when based on networks and trust. More than likely that is even necessary, in order to resist the negative aspects of the market and bureaucracy.

Combinations

But that’s not it yet, because simply relying on trust doesn't always work. Consequently, policy makers will increasingly be confronted with partnerships having a combination of market, bureaucracy and trust. Which combinations prove to be optimal and how to achieve them is an important question for modern government.

Ferry Koster is extraordinary professor at the Mr. Dr. B.J.M. Van Spaendonck Chair of Innovative Cooperation connected with the GovernanceLAB of the TIAS School for Business and Society. He conducts research into the different forms of cooperation involving innovation.