Algorithms can deliver public services, too

Diane Coyle in the Financial Times: “As economists have been pointing out for a while, the combination of always-online smartphones and matching algorithms (of the kind pioneered by Nobel Prize-winning economist Richard Thaler and others) reduces the transaction costs involved in economic exchanges. As Ronald Coase argued, transaction costs, because they limit the scope of exchanges in the market, help explain why companies exist. Where those costs are high, it is more efficient to keep the activities inside an organisation. The relevant costs are informational. But in dense urban markets the new technologies make it easy and fast to match up the two sides of a desired exchange, such as a would-be passenger and a would-be driver for a specific journey. This can expand the market (as well as substituting for existing forms of transport such as taxis and buses). It becomes viable to serve previously under-served areas, or for people to make journeys they previously could not have afforded. In principle all parties (customers, drivers and platform) can share the benefits.

Making more efficient use of assets such as cars is nice, but the economic gains come from matching demand with supply in contexts where there are no or few economies of scale — such as conveying a passenger or a patient from A to B, or providing a night’s accommodation in a specific place.

Rather than being seen as a threat to public services, the new technologies should be taken as a compelling opportunity to deliver inherently unscalable services efficiently, especially given the fiscal squeeze so many authorities are facing. Public transport is one opportunity. How else could cash-strapped transportation authorities even hope to provide a universal service on less busy routes? It is hard to see why they should not make contractual arrangements with private providers. Nor is there any good economic reason they could not adopt the algorithmic matching model themselves, although the organisational effort might defeat many.

However, in ageing societies the big prize will be organising other services such as adult social care this way. These are inherently person to person and there are few economies of scale. The financial pressures on governments in delivering care are only going to grow. Adopting a more efficient model for matching demand and supply is so obvious a possible solution that pilot schemes are under way in several cities — both public sector-led and private start-ups. In fact, if public authorities do not try new models, the private sector will certainly fill the gap….(More)”.