Public-Private Capability Test
Match essential capabilities to the institutions able to sustain them
- Difficulty
- Moderate
- Time to result
- ~weeks to results
- Steps
- 6
- Confidence
- 93%
The Public-Private Capability Test asks whether a socially essential capability can survive under normal commercial incentives. First define the required outcome, such as vaccine research, emergency testing, domestic mask capacity, or semiconductor resilience. Then examine whether private firms can earn sufficient, sustainable returns from providing it. Demand that appears only during emergencies, large upfront research costs, shareholder pressure, and cheaper foreign production may leave the market unable to maintain capacity. Next, assess what government must fund, coordinate, purchase, or regulate and what industry is better equipped to develop and manufacture. The result is a deliberately designed partnership rather than blind faith in either markets or government. Because public support changes the bargain, the test also requires explicit accountability, equitable benefits, and a reconsideration of the obligations companies owe society.
Origin
Extracted from Masters in Business through Bethany McLean's analysis of testing, vaccines, PPE, semiconductor manufacturing, and the pandemic-era relationship between government and markets.
Core principles
- 01Markets excel only when commercial incentives align with social needs
- 02Essential capacity may require public investment before demand materializes
- 03Government and industry often create critical innovations together
- 04Short-term earnings pressure can erode long-term national resilience
- 05Taxpayer support should come with an explicit social contract
How to run it
- 1
Define the essential outcome
Specify the capability that must remain available and the societal harm caused if it disappears.
Pro tip Define the minimum resilient capacity rather than an unlimited ideal.
Watch out Do not begin by assuming either government or business must own the entire solution.
- 2
Test the commercial incentives
Estimate demand stability, investment horizons, margins, and the likelihood that shareholders will support the capability over time.
Pro tip Model both ordinary periods and emergency demand spikes.
Watch out Temporary crisis profits do not necessarily support capacity between crises.
- 3
Locate the market failure
Identify where short-term profit pressure, externalized risk, uncertain demand, or global cost competition undermines the required outcome.
Pro tip Ask whether society pays for the failure even when the company does not.
Watch out Do not label every disappointing market outcome a market failure.
- 4
Assign complementary roles
Give government responsibility for appropriate funding, guarantees, standards, or coordination while using private-sector research, production, and logistics where effective.
Pro tip Assign each role to the institution with the relevant capability, not the loudest stakeholder.
Watch out Diffuse responsibility can leave nobody accountable during a crisis.
- 5
Set the social contract
Define performance obligations, access requirements, transparency, and public returns that accompany taxpayer support.
Pro tip Agree on obligations before emergency funding is needed.
Watch out Publicly absorbing losses while leaving all gains private weakens legitimacy.
- 6
Audit resilience over time
Periodically verify that capacity still exists and that incentives have not pushed critical functions offshore or allowed them to decay.
Pro tip Use operational readiness tests rather than relying only on reports.
Watch out Capabilities built immediately after a crisis often disappear as attention and demand fade.
In the wild
A government determines that emergency mask production is essential but commercially unstable between outbreaks. It offers long-term purchase guarantees to qualified domestic manufacturers in exchange for audited surge capacity, quality standards, and transparent pricing.
→ Manufacturers can justify maintaining equipment and staff while society retains dependable emergency production.
Private investors avoid a vaccine platform because outbreaks are unpredictable and government buyers constrain profits. Public agencies fund foundational research and guarantee emergency purchases, while pharmaceutical firms conduct trials and scale manufacturing under independent safety oversight.
→ Long-horizon public funding and private execution jointly produce a capability neither side would reliably create alone.
Common mistakes
Assuming markets automatically provide
Critical products with intermittent demand or uncertain returns may remain unprofitable until society urgently needs them.
Replacing markets with vague government control
Public involvement must address a defined incentive or capability gap and preserve the strengths of competent private operators.
Ignoring obligations after a bailout
Taxpayer support without performance requirements or public benefits leaves the underlying social contract unresolved.
Is it for you?
Best for
It is best for evaluating healthcare, emergency supplies, research, infrastructure, defense, and other socially critical capabilities.
Not ideal for
It is not ideal for ordinary competitive products whose demand, pricing, and failure costs are adequately handled by functioning markets.
From the transcript
“capitalism can't do everything. Markets can't do everything. You need a functioning government and functioning markets,”
“you have to be aware of where capitalism works and where it doesn't work.”
“don't we need to rethink the contract between companies and society.”
From the episode
Bethany McLean on the Pandemic's Big Fail