The dynamics of private and public ownership

In discussions on the pros and cons of private versus public ownership one should consider competition, decision-making and the dynamics of relationships between firms and governments.

I figure the people who run firms behave in similar ways regardless of who owns the firm. Most of us most of the time think and act in our own short-term interests. This applies to most the people in government and business and makes for interesting dynamics where people do not always behave according to what they say.

Generally people in business dislike competition and try to limit it.  One way to restrict competition is to get governments to pass legislation which interferes with the operation of markets. licensing, tariffs, subsidies, patents and copyright all restrict competition and allow some firms to obtain profits they otherwise would not have.  This creates dynamics between firms (or business associations) and governments as firms want to ensure they have sympathetic governments and governments want business to support them..

The people in charge of governments generally want to remain in power and therefore most of their decision-making is to this end.  Thus the main difference between private and public ownership is in decision-making.  Private owners want to make profits while government owners want  to remain in power.  They want businesses under their control to make management decisions which will help in  a reelection (Or in the case of dictatorships to limit uprisings) and they also want to reward supporters with plum jobs.

All of this is further complicated by the fact that managers and owners (private or public)  may have different goals.  Managers may want to build empires rather than maximise profits.

Where do us consumers fit into this?  There are always people in government and industry who say they are working for our best interests but most of the time I don’t believe them.  Generally our best interest is served when there is competition.  However, as noted above governments and industry work hard to restrict competition.  When  we have competition we get the best prices and a generally efficient economy.  In a competitive economy consumers get to make decisions according to their values.

 

 

Governments, competition and subsidies

Is it legitimate for city governments to get involved in the economy as The Economist reports a number of mayors are doing?  Governments have been involved in their economies for millenia.  For us this involvement helps a some people make profits and when the economy is tough it helps a few people get jobs.

There are two ways governments get involved in economics – by passing legislation that restricts competition and by giving subsidies either in cash or tax exemptions.

Most economic legislation at the national level works to restrict competition. Patents, copyright, licensing and tariffs all limit competition and allow the firms protected to charge higher prices and make profits they would not otherwise have had.  It may be the most  valuable business skill is government relations and lobbying.  During the recent golden age of prosperity with constant economic growth the higher prices have hardly been noticeable and for most people not relevant.  As we go into a period of economic decline already lot of people are hurting.

The other way governments influence the economy is with subsidies or tax exemptions.  

There are three concerns about government involvement in the economy.  

The first is that protection from competition and subsidies distort prices and encourage inefficiencies in the economy.  It might be cheaper and more efficient to make wing nuts in one place but subsidies alter that.  It may be that competition is now to determine  which, city or state/province has the deepest pockets for providing subsidies.  When firms can go where they get the largest subsidy, there is an element of blackmail and it is not clear this is a good way to start a relationship.

The second concern is that most of us most of the time make decisions for our own short-term interests rather than the long-term interests of the community.  For most of us a job today is more important than the future health of the planet or even survival of the human race.  Also one has to suspect that in this respect politicians are at the head of the line especially when they want to get reelected.

A third concern is that subsidies are good at providing jobs for a lucky few people but provide no benefit for the rest of the unemployed.  I believe subsides should be given to consumers rather than producers so that they don’t distort prices and can provide assistance to all who need it.

DI_404_SUCKZ_Stephen_HarperOne can make lots of arguments against government involvement in the economy, but one is fighting a lot of short-term interests.  The Canadian prime minister is the chief executive officer of corporate Canada.  This applies to the incumbent and probably to most past and holders of that post.

High pay packages and restricted competition

The Economist appears to be defending high pay packages for company bosses in this article about the current focus of criticism.  The argument is that $52 million is justified by performance but one has to ask if this performance is based on the skills of the chief executive and if so what skills.

The general rule is that firms make profits by getting governments to pass legislation which restricts competition.shokunin_businessman

I don’t know much about the health care industry (the firm is McKesson, a big American wholesaler of drugs and other health-care supplies) but this industry involves a lot of emotions in that many people will use a lot of purchasing power in the hope of living an extra two years – possibly in a nursing home.  It is also an industry that depends upon patents for its profits.

It is not clear to me that this firm is making huge profits because of the skills of its boss.  Maybe the smartest thing this guy did was to get into the health care industry.

I am also wondering about the ethics and morality of a firm (or industry) that uses patents to exploit people’s emotions to make excessive profits.  But what the heck, some of the points in this post probably apply to a lot of other industries.

Regulating the cruise industry

Last week’s floating stool ship has put a little focus on the cruise ship industry and brought forth some suggestions the industry requires more regulation.

It appears that by cruising between international ports the industry has avoided coming under the jurisdiction of any one government.  It also appears to be a highly competitive industry and one that is prospering.  Maybe there is a lesson here about competition and government interference.

johnny_automatic_ocean_linerI have a theory that at the request of business governments pass laws to restrict competition in the belief that there will be greater profits if there is less competition.  Then to control the excesses of monopoly they introduce regulations.    If this is correct an industry in which competition is not restricted has no need for regulations.

It seems to me the cruise ship industry is regulated by its customers.  It is highly competitive and depends very much on returning customers.  These guys have to look after their customers.  If there develops a perception that the Carnival Triumph passengers are not being treated fairly or that ships are not being properly maintained,  the whole industry will probably pay for it.

Employees may not be in such a strong position.  Wages tend to be a function of supply and demand and the cruise companies draw their unskilled employees from the world market.  The companies benefit from world over population.  So  do the passengers whose fare would be quite a bit higher if the ships had to pay all their employees North American wages.  Employees also benefit from higher wages than they would get at home.

We have to note that a lot of companies in North America (and their customers) also benefit from the low wages that go with high unemployment.

One way to deal with the exploitation of labor would be some sort of guaranteed annual income which would make it a little less necessary for workers to accept poor pay or working conditions.

Austerity and more austerity

This week’s The Economist has an article on austerity which has turned out to be worse that some people expected.

I see this article as a part of the debate/conflict over austerity vs stimulus. I also think the economic crisis is a result of our depleting the topsoil and using up the most easily accessible energy and mineral resources.  As the easiest resources are used the costs of additional resources increases and this has to force painful adjustments in the economy.

If this analysis is correct then it is likely a great deal more austerity will be forced upon us regardless of what we do.  Austerity has had a greater negative impact on our economy than a lot of people expected and more and more observers are saying  the economic crisis will continue for some time.

The austerity – stimulus debate will probably continue so long as people believe a return to economic growth is just around the corner.

Limiting our thinking to just these two choices presents  us with  a dilemma.  Stimulus will continue to use up resources and bring forward the timing of a major economic collapse.  Austerity on the other hand is forcing suffering on many people.

Which side a person takes probably depends upon how one is affected by inflation as stimulus generally causes inflation and austerity generally leads to deflation .

Those people who have savings in the financial system are likely to lose some of their purchasing power from inflation and therefore want austerity.  Those people who are borrowers, including governments, are likely to benefit from inflation.  Governments tend to prefer inflation as it reduces their debt load (at the expense of bond holders) but they also have to convince people to continue to loan to them.

The essay “LETS go market: Dealing with the economic crisis”  on this weblog attempts to show how we might deal with the current economic crisis.  Even
so just thinking about the problem leaves me feeling down because I think the outcome will be a few people doing very well and a lot of people experiencing a lot of suffering.

 

If you liked this post your are invited to comment, press the like button and/or click  one of the share buttons. If you disagree you are invited to say why in a comment.  While I like the idea of sharing this platform, my personality is such that I don’t reply to many comments.

Greed, financial crises and regulation

When greed. irrational exuberance or willful misconduct within the financial industry are seen to cause a financial crisis, then we start hearing calls for more regulation as if regulation can control unacceptable human behaviors.

Here’s a theory to explain it all.

Business people, especially financiers,  don’t  like competition and call upon governments to pass legislation which restricts competition.  This allows profits on top of wages and a return on investment.  It also provides opportunities for exploitation.  When the exploitation gets out of hand and becomes obvious or when there is a financial crisis caused by the way in which money is created, then we get calls for more regulation.

The best way to deal with greed and willful misconduct is probably to increase competition by repealing legislation which restricts competition.  The way to deal with financial crises is to change the way in which we create money.

How many subsidies?

A blogger who is opposed to subsidies because they distort prices and who believes subsidies should be given to consumers rather than producers cannot ignore this link.

It features a graph showing many ways in which governments provide assistance to businesses..

No way can we think of our economy as one based on a competitive market.

If you liked this post your are invited to comment, press the like button and/or click  one of the share buttons. If you disagree you are invited to say why in a comment.  While I like the idea of sharing this platform, my personality is such that I don’t reply to many comments.

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