Author: Carlos Eduardo Soares Gonçalves

Source: Valor Econômico, 19/06/2009

Few things give you as much headache as playing a work at home. I am not just talking about the irritating mess and dust that gets into any gap in the cupboards, but mainly about the repeated and inevitable quarrels with those who actually do the work: the mason. Why is that?

The bottom line is that the interests of these professionals are never perfectly aligned with those of the home owner. For him, what matters most is that the renovation of his house comes out on time and without any technical repair. That also counts - for intrinsic honesty, or because if the image is tarnished, he has more difficulties finding new customers - but not to the same degree. The mason has his interests, which are to some extent contradictory with those of the owner of the property. He wants to be able to take more than one piece of work to earn more, he doesn't want to leave at 20 pm to avoid being beaten by his wife at home, etc.

As a matter of fact, it is not just the lack of alignment of interests that is the cause of the dissatisfaction of homeowners. Conflict of interest, after all, exists in almost every economic transaction. What is special about the works is the difficulty of writing a formal contract stipulating in detail what the bricklayer should and should not do, their schedules, among other things. Why does this not exist? Now, to begin with, who will monitor compliance with the various clauses of this contract? In addition, how do you know if the work was delayed for technical reasons and independent of the bricklayer's efforts or because he fumbled with other reforms simultaneously?

Of course, much of the information needed to judge in what dimensions the contract was in fact not fulfilled is not easily verifiable and, therefore, it is not at all easy to bring formal justice in this case. That is why this contract rarely exists.

The lesson here is: there is no easy solution for the owner-bricklayer imbroglio. Not paying help in advance, going to work at lunch time too, but none of this satisfactorily solves the problem.

We delegate our work to the mason because we don't have the technical knowledge to do it with our own hands and because we have other things to do, such as writing articles for Valor. Similarly, all of us, as a society, delegate various functions to the government to carry out because the private market alone is not able to address them properly. The government and its employees are, therefore, our contractors, masons of society.

Economic theory in fact suggests several tasks to be performed by the Mason State.

First, the government needs to provide the basic infrastructure needed for private markets to function properly. This includes both an adequate physical structure (such as good quality roads and ports during early stages of private sector development) and a system of stable laws and rules that protect people's individual and property rights. The list includes the standardization of measurement and quality control systems, which facilitate exchanges between citizens and, therefore, the development of private markets.

And to enforce the rules it is necessary to have a good quality legal and criminal system, in addition to the coercive force of the police. See that even the existence of a national currency and its stability are essential public goods provided to the private sector by the government for it to function properly.

In short, without a government there is no market and that is partly why we are required to pay taxes that finance the supply of these goods.

Second, when the consequences of our individual actions fall on other people and we do not take this fully into account (which is usually the case), public intervention is also justified. This is true both for cases where we cause problems for others and for situations in which we disregard the benefits of our actions on others.

To illustrate the first situation, we need a government regulating and taxing the emission of pollutants by companies (which harm people who use rivers for fishing and dirty the air we breathe), for example. In the second type of situation, it is necessary, for example, to provide free vaccination against communicable diseases and to impose that anti-dengue “smoke” staff can legally enter your home to prevent the transmitting mosquito from contaminating your neighbors.

Third, since in some sectors of the economy it is natural that there are few firms offering a given service or asset (this occurs in sectors in which, in order to become economically viable, the company needs to be very large) we need a government that prevents this market concentration implies very high prices and consequently low quantities offered. For example, it makes sense that there is a government agency like Anatel regulating the operation of communication companies, and its sister, Aneel, establishing rules guiding the operation of companies that sell energy to us.

Finally, it is also up to the State to redistribute the wealth generated in society, taxing the wealthiest to donate income and goods to the most disadvantaged. This role is justified because, to a large extent, income inequality between people comes from a very unequal initial life condition. Whoever is born in poverty, the son of parents with very little formal education, will have poorer health and education and will probably start working ahead of time in degrading professions, which will indelibly compromise their ability to achieve some economic success and lead a better life than the of their parents.

No one chooses to be born with few opportunities, so it is consistent for the government to provide assistance to the most deprived, both to improve their future prospects and alleviate their current suffering and to make it possible for their descendants to achieve a better economic standard in adulthood.

This transfer is not always made through direct monetary means, that is to say. For example, most governments provide a free educational system for low-income children. It wouldn't have to be that way. An alternative is for the government to pay for the education of the poorest, subsidizing their enrollment in schools managed by the private sector.

In any case, what matters is that there is a good argument in defense of the role of income distributor, and part of this transfer must even be directed to specific expenses, such as the education of children. This is because it does not make much sense to give money to children and explain to them the importance of spending it on education (and some parents may use the money less satisfactorily).

However, as the ensuing corruption scandals and the flagrant inefficiency of some public bodies make clear, government bureaucracy does not work as society would have it. Even when the task is justified, it is often performed inefficiently. In addition, many activities performed by the government do not even have to do with the functions described above.

This is because the government and the state bureaucracy are like the mason: their concerns are not only with the interests of those who pay their salaries, that is, society. Indeed, these interests are sometimes in open opposition, as when a government official strives to divert public money into his pocket; while in others they are only weakly aligned: the case of an honest employee, who does not try very hard, however, to do a good job and always goes home at 16 pm.

As in the case of bricklayers, it is difficult to make the public bureaucracy worry more about the interests of the people who pay their salaries. We believe, however, that administrative reform, affecting government officials' incentives, could help society receive better quality public goods. For example, wages today in the state sector are practically independent of the bureaucrat's productivity. In addition, it is almost impossible to fire inefficient employees. It is even very difficult to relocate them from posts that are becoming obsolete to functions that are becoming a priority with changes in the economy and society.

Part of the explanation for these “rigidities” lies in the fact that the immediate heads of bureaucrats are politicians and the great bureaucrats, who are also masons in our service and have interests of their own, as well as their subordinates. Total flexibility to fire employees and change their salaries would give a lot of power to this group of masons at the top of the hierarchy, which would not be good either. In any case, some space exists to adjust incentives in the public sector.

At the University of São Paulo, for example, a professor who is committed to giving a good class, doing good quality research, guiding student work, etc., earns exactly the same thing as another who does none of this. Let's face it, the single salary strategy, coupled with the impossibility of dismissal, is not a good mechanism to encourage teachers to work more for society, to prepare a decent class and to keep updating.

Of course, some will always strive to do so because they love what they do and have a sense of responsibility. But some swallows just don't make a summer, as we all know well. Why not link part of these professionals' salaries to objective measures of academic performance? It is this type of change that we think would need to be included in a reform by changing the incentive structure within the public sector.

While I finish here, my cell phone rings incessantly ... It seems that there was a problem with the work at home.

Carlos Eduardo Soares Gonçalves, professor at FEA / USP, and Bernardo Guimarães, professor at the London School of Economics, are authors of “Economia sem Truques” (Campus / Elsevier).