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.

 

 

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Counting money

Bank tellers tend to be very fast and very accurate at counting money.  Economists have a more difficult time of it.  They can’t even agree on a definition.  This post was prompted by this article criticizing The Fed on how it measures the money supply.

Once upon a time I worked as a journalist.  I used to say there are two types of figures.  One kind we photographed and put on the front page and they help to sell newspapers.  The other kind help to put things into perspective.  When I got to university and wanted to study economics I found I didn’t have the calculus skills to do econometrics so I have stayed with my idea that statistics help with perspectives.

mystica_Coins_Money_Economics is about relationships.  It is about the relationships that go with the exchange of goods and services and since some exchanges involve the state it is also about our relationships with governments.

Not all exchanges can be recorded let alone measured therefore statistics are of limited use.

Mathematical concepts are useful in that they can simplify the analysis of relationships and help us understand what is happening.  Sometimes statistics can be useful for evaluating things we want to believe.  One should be leery of drawing conclusions from emotional accounts of events.  For example, a former professor claimed that during the industrial revolution things got worse for working people before they got better.  One of his arguments was highly emotional newspaper accounts of children dying in poverty.  I would have been more convinced it he had produced statistics of child mortality rates before, during and after the industrial revolution.

Back to money.  For economists it is difficult to count because there are so many things including cigarettes and candy have been used and there are a number of economic  definitions  depending upon what types of bank deposits are included.  I figure money should be defined as anything that represents purchasing power including and especially computer impulses.

Money is my favorite subject although I have never wanted to be a bank teller.

Protecting customers from the banks

What can governments do to help consumers protect their interests when dealing with financial institutions? (Or any other industry)   I suggest increasing competition and requiring firms to publish more information would be more effective than regulation.

I figure governments pass legislation to restrict competition.  This allows firms in the protected industry to collect  profits they wouldn’t otherwise get.  When the firms protected by the legislation get out of hand and blatantly exploit their customers governments introduce regulations to limit the offensive behavior. This is to protect consumers.

Generally the way to restrict competition in the financial industry is via licensing.  Therefore the way to increase competition is to loosen licensing requirements so that more firms can get into the industry.  More competition should reduce the opportunities for exploitive behavior.

The other way to protect the interests of consumers is to require firms to publish plenty of information about their business so their customers have the knowledge with which to protect themselves.  In banking this should include detailed information about their loan portfolios.

Shouldn’t  depositors have the right to know to whom their money has been loaned?   If a depositor has this information then he or she can evaluate the safety of the deposit.  If there are concerns about where a firm is lending one’s money then one can take the deposit someplace else.

This post was written after reading in The Guardian a concern that financial reform in Britain will not lead to more competition.  You can see the article here.

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.

Milton Friedman and Money Mischief

I have just finished reading Money Mischief, Episodes in monetary history by Milton Friedman published about 20 years ago.

Friedman is remembered for his interest in the economics of money and banking. However, I have two concerns about omissions from this book.  The first is that he places too little emphasis on the T or Q in the quantity theory formula and the second is that he has missed the significance of interest in the creation of money.

Any discussion of money in economics has to include the formula MV=PT because this shows how the real and financial sides of the economy are connected.  This formula states that the stock of money times the velocity with which it changes hands is equal to a price index times the total of transactions or the quantity of goods and services exchanged.

Friedman uses this formula to support a claim that inflation is purely a monetary thing.  Prices go up when there is too much money in the economy and governments control the total amount of money.

My concern is that he does not appear to recognize the potential of T (or Q) to disrupt the economy.

In the chapter on money he suggests T could go down because workers are “paying less attention to their work and more to the stock ticker.”  A few pages later he states: “What happens to output depends on real factors: the enterprise, ingenuity and industry of the people; the extent of thrift; the structure of industry and government; the relations among nations; and so on.”

He may be excused on the grounds that throughout recorded economic history downward changes in T have not been an obvious problem.

However, there is some evidence that the resource base is now being depleted, or at least the most easily extractable, of the resources are gone.  This is certainly going to impact on the T in the formula.  Other things which could impact the formula are climate change, natural disasters or disease epidemics.

MY second concern relates to the role of interest in the creation of money.  Friedman didn’t see this and I have not come across any other economist who has recognized it.

During the 20th century there was a change in the nature of money from that based on a commodity (gold or silver) to money based on fractional reserves and credit.  (For a more detailed discussion of fractional reserve money and its problems, please see my essay “LETS go to market.”)

So long as money was based on gold the total supply was limited by the amount of gold and could be increased only as more gold was dug out of the ground.  If you look at the formula it is easily seen that this could cause problems in a growing economy.

With the switch to fractional reserve money the problem became reversed.  Now there is the potential for too much money to be available.

One of the differences between commodity money and fractional reserve money is that with the latter as new money is created the creators (the banks) demand that interest be paid on that new money.  I see this as a  built n force requiring that even more money be created to pay interest.  I see this as a sort of Ponzi scheme which from time to time collapses into a financial crisis.

Friedman provides a different take on why the money supply is increasing.  “Whatever may have been true for money linked to silver and gold, with today’s paper money it is governments and governments alone that can produce excessive monetary growth, and hence inflation.”

I have to take issue with him.  Fractional reserve money is not paper. It is entries in the computers of the banks.  Governments are involved in its creation when their bonds are purchased by central banks.  It might be good for governments to stop issuing bonds but I am not sure it is fair to blame them for inflation.

However we create money, the formula makes it clear that if the goal is price stability the money supply or its velocity must be easily variable.

Economic theory and anti-smoking graphics

So the tobacco companies are going to court to try and stop a government requirement that they show graphic anti-smoking images on cigarette packages.

I don’t smoke and I don’t like to see other people smoking.  Nor do I like to tell others not to smoke

I also like the perfect competition model which says that all participants in a market should have complete information about the products and the market conditions.  I believe it is good for governments to require firms to publish information about their business so that consumers can make informed decisions according to their own values.  This is probably the best and maybe the only way governments should interfere in the economy.

So are emotional pictures a part of the required knowledge about a product that is highly addictive?  What other information about the industry should its customers know?

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