In the private sector, markets are commonly used and accepted. After all, the natural tug and pull of the market’s supply-and-demand forces is nothing more than a reflection of the wisdom of crowds.

But in the public sector, the notion of applying market techniques can be a lightning rod. Market-based government is often equated, negatively, with privatization and outsourcing—a circumstance that polarizes people ideologically and creates barriers to government reform.

Is it possible to reframe the idea of market-based government so that it is no longer seen as an ideology but as a fact-based set of techniques? These techniques could leverage the “wisdom of crowds” to manage government services and programs more efficiently and effectively than traditional, expert-driven, command-and-control approaches to public management.

There is no question that we need greater clarity in the idea of market-based government. President Bush has called for a market-based government that is rooted in “competition, innovation and choice.” But he left any specific characteristics largely undefined.

"Is it possible to reframe the idea of market-based government so that it is no longer seen as an ideology?"

Over the past two decades, however, federal, state and local governments have experimented with market-based methods. Drawing from those cumulative experiences, we can generate the following definition: Market-based government encompasses “a body of tools and incentives to guide public action by embodying some of the beneficial characteristics inherent in private-sector markets.”

In general, these public sector, market-based tools create a set of incentives, rather than rules, to set the price of services or desired levels of performance. These incentives include techniques such as:

• Creating competition among providers, inside and outside government, through systems such as franchise funds—intergovernmental funds to provide common support services.
• Letting citizens make choices among different providers of services through the use of instruments such as vouchers.
• Allowing informed choices, such as a Medicare Web site that lets users compare detailed data about nursing homes.

Market-based approaches typically include the use of what economists call “principal-agent” theory, in which one party contracts with another for the delivery of a clearly defined set of services; a range of choices for the customer; competition among providers; and transparency in both costs and services delivered.

By using these kinds of market-oriented techniques, the role of government increasingly will become that of overseeing the application of a set of incentives to encourage a certain kind of behavior.

But what about the policy tools to create market-based government? Over the past five years, the most politically prominent tool has been competitive sourcing. One of the five key items on the President’s Management Agenda, competitive sourcing has been treated almost as the sole approach to meeting the president’s vision of a market-based government.

In reality, however, it is only one technique among many. It is not the answer. Depending on the circumstances, other tools might more appropriately be tried first. Indeed, policy-makers have at least two dozen other market-based tools at their disposal, including public-private partnerships, franchise funds, even bartering.

The tools that can be used in a market-based government framework can be grouped into three different strategic approaches: delivering government services to the public via a range of market-based tools (with a special emphasis on public-sector vs. private-sector competition); providing internal government services using market incentives; and setting regulatory standards or pricing levels, rather than using command-and-control methods, to influence private-sector behavior.

No single market-based approach will work in all circumstances. But choosing from a range of tools can help public organizations more readily adapt market-based techniques. The bottom line seems to be that these approaches work when they are properly managed and have broad applicability across different government policy and program areas.

In the end, market-based techniques can not only improve government operations and services, but also can help government leaders tap the wisdom of crowds as they seek major reforms in government.

Organizational guru Margaret Wheatley, extolling the value of self-organizing systems such as markets, says those systems impart “what all leaders want: the capacity to respond continuously to change.”

John Kamensky is a senior fellow with the IBM Center for the Business of Government, where he co-edited with IBM vice president Albert Morales the book Competition, Choice and Incentives in Government Programs (Rowman & Littlefield, 2006). Kamensky is also an associate partner with the IBM Business Consulting Services and a fellow of the National Academy for Public Administration.