The Profit Motive in the Public Sector

by Reihan Salam

In Against the Profit Motive, Nicholas Parrillo, a legal historian at Yale Law School, recounts the “salary revolution” in U.S. administrative history. For much of American history, public officials were compensated in a variety of ways we’d now find quite unusual:

Judges charged fees for transactions in the cases they heard. District attorneys won a fee for each criminal they convicted. Tax investigators received a percentage of the evasions they discovered. Naval officers were awarded a percentage of the value of the ships they captured, plus bounties for the enemy sailors on board ships they sank. Militiamen enjoyed rewards for capturing Indians or taking their scalps. Policemen were allowed rewards for recovering stolen property or arresting suspects. Jailors collected fees from inmates for permitting them various privileges, and the managers of penitentiaries had a share of the product of inmates’ labor. Clerks deciding immigrants’ applications for citizenship took a fee for every application. Government doctors deciding veterans’ applications for benefits did the same, as did federal land officers deciding settlers’ applications for homesteads. Even diplomats could lawfully accept a “gift” from a foreign government upon finalizing a treaty.

Parrillo distinguishes between two broad types of pay that were common before the salary revolution — facilitative payments (the officer is paid for performing a service a person wants or needs) and bounties (the officer is paid for performing a “service” the person in question would rather the officer did not perform, like making an arrest or seizing an asset). Over time, people became convinced that facilitative payments were corrupting because they were a recipe for inconsistent as opposed to equal treatment, and because they led officers to treat those who make facilitative payments as customers, with all that entails; the critique of bounties flowed from the fact that they worked all too well in fostering an adversarial relationship between officials and the targets of their efforts. The salary emerged as a solution that fell between the two:

Taken together, lawmakers’ disillusionment with facilitative payments and with bounties resulted in a convergence upon the solution of paying officials by salary. The salary embodied a new state-society relationship, one that distanced the official from the wishes of the layperson (in contrast to the facilitative pay- ment) without radically alienating the two from each other (in contrast to the bounty). Compared with the two old forms of compensation, the salary placed the official in a middle distance vis-à-vis the population.

Moreover, Parrillo suggests that salarization was not not primarily about providing officials with career stability or imposing top-down control within bureaucracies. Rather, it was about the realization among lawmakers that laypeople will only fully cooperate with government officials if they consider them legitimate, and how facilitative payments and bounties undermine perceptions of legitimacy.

One of the reasons Parrillo’s book is worth reading is that for all the weaknesses he identifies in facilitate payments and bounties, they also have virtues that modern policymakers are rediscovering in fits and starts. So Against the Profit Motive can be understood as a cautionary tale in moving away from salarization, or as guide to pitfalls that those of us who are interested in experimenting with a more entrepreneurial approach to delivering public services ought to at least keep in mind.

The Agenda

NRO’s domestic-policy blog, by Reihan Salam.