JULY 2019

Escaping from self-fulfilling prophecy

In strict terms and according to the sociologist Robert Merton, a self-fulfilling prophecy is a false definition of a situation or person that evokes a new behavior, which makes the false conception become true. According to him, this deceptive validity perpetuates the error and the holder of the false belief, will perceive the course of events as proof that he was right from the beginning.

At the level of relationships between people, for example, a self-fulfilling prophecy is a powerful psychological effect when the expectations of another person’s abilities influence how that person sees himself.

However, this could not only be applied in sociology or psychology, but we could also extend the use of the concept to other areas such as the dynamics and development of institutions, companies and their ownership and governance schemes.

In repeated discussion spaces in Latin America and the Caribbean, I have heard a recurring argument with a high ideological content that, in summary, is based on the fact that everything public is inefficient, and that management and ownership by private agents is efficient and convenient for society. Therefore, the efficiency would come exclusively from the hand of the action of the markets, being the public management by definition inefficient and intrinsically corrupt, representing a heavy burden for society as a whole.

Argimon, Artola and González-Páramo (1998), in the work entitled “Public company and private company: Ownership and Relative Efficiency”, affirm that there are some features of the behavior of the public company that could suggest a close link between public ownership and inefficiency: low profitability, overloaded templates, budget dependency, among others. However, the evaluation of the behavior and results of the public company responds to a multiplicity of purposes, for which reason efficiency cannot be measured in the same absolute terms as in private companies. Comparison based on criteria such as profit or return on capital may be affected by the attribution to the public company of other objectives, therefore being inappropriate in non-competitive contexts or characterized by the existence of other “market failures”.

The debate on the relative efficiency of the public company has generated a large amount of research that shows that the private company does not always behave better, in terms of productive efficiency, than the public company. Works by Vickers and Yarrow (1988) , Pestieau and Tulkens (1993), González-Páramo (1995) and Martin and Parker (1997) are some examples.

Therefore, it can be argued with solid foundations that the premise that the companies in control of the State are intrinsically inefficient is false, however, from that simple conceptual construction that starts from false premises, it ends up generating an opinion contrary to intervention. of the State in business activity. This generalized state of opinion conditions political actors, fueling the latent conflict between the corporations that make up the company and society itself, and as a consequence internal capacities are weakened since it is not possible to retain talent, the foundations of organizations and the institutionality that supports them are eroded. Immediately afterwards, there is a restriction in the allocation of resources by the political system that integrates the governance of companies in control of the State. Thus, we gradually fall into that self-fulfilling prophecy, in which companies fail to demonstrate comparable results with some of their private peers, acts of corruption emerge and a vicious spiral of difficult return is entered. And without realizing it, we destroy value, value that society as a whole loses. But we do keep in mind that this value lost by society may represent a significant future gain for other interest groups that do not necessarily seek to maximize social benefit.

But is it a problem that can be assigned to the ownership of the company? Clearly not, because in an economy formed by perfect markets with private property, profit maximization would guarantee efficient results, but, as Vickers (1993) and González-Páramo and López Casasnovas (1997) argue, in imperfect markets, the ownership-efficiency relationship is much less clear and the maximization of benefits, to which private agents would be oriented, is not a necessary or sufficient condition of efficiency. Being the issues that affect efficiency the existence of multiple objectives, the influence that interest groups may have in management, the deficiency at the level of the governing bodies, the absence of reporting disciplines that induce capital markets, the presence of soft restrictions at budgetary level and weakness at the level of administrative controls (Argimon, Artola and González-Páramo, 1998).

Mazzucato (2013) in his book “The entrepreneurial State: myths of the public sector versus the private sector” gives clear examples that, in issues such as innovation, the State has played a fundamental role in different sectors, including biotechnology, pharmaceuticals and clean technologies, by making high-risk investments in innovation long before the private sector began its direct intervention. In all of these examples, risks are socialized while rewards end up being privatized. In this sense, public companies can act as catalysts for changes when they adopt disruptive innovations and move towards substituting new sources and technologies.

That is why I propose that we raise the level of discussion on this particular topic, work on the fundamental aspects that refer to productive efficiency, transparency, innovation and how to achieve the maximization of social welfare and the generation of wealth, with participation in mixed regimes that integrate the State and private agents. Let us discuss the specific role of the State as a corrector of “market failures” but also as a creator of wealth and an engine of innovation. Let’s talk about the need for State Policies that provide certainty to private agents, about changes and improvements in regulation and the existence of a stable legal framework that allows respecting contracts between the various market agents. Furthermore, let us discuss how we can achieve efficiency by establishing correct governance schemes and fundamentally strengthening our institutions.

Let us not feed the self-fulfilling prophecy that in itself what it does is destroy a value that is genuine in our nations and we leave the facilitator and ideological discussion that raises the dichotomy between the Public and the Private. They are not sides in conflict, we are talking about agents that respond to different interests, that have a different objective function, but that are essentially complementary to our development and that the existence of both is fundamental for the construction of our society and citizenship. 

Alfonso Blanco

Executive Secretary of OLADE 


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