A public good isn’t one that’s made by the state’s enterprises. There are excellent, and not so good, reasons for the state to hold a large fraction of the productive capital in the economy. The state may also turn out to be the best provider for some public goods, but that’s a consequence, not the source, of their definition.
A public good is also not the same as a good whose provision is a moral necessity. Sometimes the two are aligned, but they’re not the same. Providing food is a moral necessity, but usually it’s handled as a private good. Public transport isn’t a pressing moral necessity, but I argue it is best handled as a public good.
At a certain point on its demand curve, a good is marginally public if the net benefit to society increases when the price, or other barrier to consumption, decreases. It is marginally private if the converse happens. Colloquially we can say a good is public if it’s marginally public for all realistic price points, and we can call a good private in the converse case.
In any closed economy, be it people in a village or countries on the planet, there will always be trade imbalances. For any number of reasons, some people will be more productive than others. Let’s say in one place it rains a lot and that makes people boring and hard-working. In another place it’s sunny and the inhabitants are lazy. The boring people manage to make twice as much stuff each month than the lazy ones. What happens when they try to trade? There are two main options:
They trade at fair prices and even balance (no borrowing). That’s stable and arguably fair, but overall trade is limited by how much the lazy people can produce. Even though the boring people could produce more to sell, the lazy ones can’t produce enough to afford it.
They trade at skewed prices. Everyone produces as much as they can. The boring people essentially barter their suff with the lazy people, so there’s a net transfer of value from boring-land to lazy-land while the money balance stays even.
These are the two overall options. For the first option, which we’l call “fiscally responsible” there are two variants:
Here’s an update as to what is happening with Greece. First, some numbers from the 2011 Greek budget:
Total revenue: €128 billion
Real revenues from taxes etc. €55 billion
Aid from the EU €3 billion
Borrowing from the market, including rollover €70 billion
Total expenses: €128 billion
Real expenses such as pensions, health etc. €63 billion
Debt rollover and interest payments €65 billion
And another pair of interesting numbers
Interest rate charged by the market for German bonds, 2 year maturity: 2%
And for Greek bonds: Around 25%, rising
So, what does all this mean?
Real deficit
In summary the Greek state is like a business that takes in €55 bn in sales but pays €63 bn in salaries and what have you, so it makes a real loss of €8 bn, or 14%. To recover, the state needs to increase revenue by extracting more taxes or running profitable businesses, or it must cut the amount that it pays to the Greek people, or some combination thereof. If it doesn’t the Greek state will run bankrupt anyway, abruptly cut expenses to €55 bn, and go on living in a hand-to-mouth way.
I’m not happy with this post. I tried to mix some rather speculative economic thinking with an attempt to explain to a wide audience, and it doesn’t work. I’ll rewrite it as geeky economic article.
The asset bubble that started in the late 1990s and exploded in 2007 as the financial crisis was caused, in my opinion, by our monetary system. In particular, the following cycle took place:
The general public in western, mainly Anglo-Saxon, economies started using real estate as hard money, profiting from its parasitic appreciation linked to GDP growth. The real economy deflated against housing.
Banks issued new money backed by the rising real estate. This broke monetary policy by expanding the money supply first as intended but then beyond, as banks used securitized debt to evade regulation and recycle their license to create money and use it as their capital.
A positive feedback loop developed, where appreciating houses led to banks issuing more money, which led to inflation of money against housing. The market responded by raising house prices further, until both housing and housing-backed money crashed.
The system of money used by western economies, although no secret, is not widely understood by the public. I’ll explain how our monetary system works, how it caused the crisis, and how it ought to be reformed in principle. Obviously I have no tried and tested new system to propose, but I’ll try to articulate what new conditions it should meet.
Hard money and its parasitic appreciation on GDP
The traditional conception of money is as a fixed quantity, such as a ton of gold. It changes hands, and some people hoard it, but it doesn’t grow or shrink. That way the value of goods can settle against gold through the market. This “hard money” concept served well for most of history because the size of the real economy didn’t change much either. In a static economy, a gold coin buys a sack of wheat, say, now or in a hundred years. Using gold does nothing to erode inequality, but doesn’t amplify it either. Sitting on gold yields zero return, so any productive investment whose risk-adjusted real return is above zero beats that, and will probably get funded.
We’re in the third phase of the financial crisis that peaked in 2008. The events of 2007-2009, which are generally called “The Crisis”, were only phase two. The three phases are:
Phase One: Creation of false assets by private speculators, mostly banks and individuals who play the property market. These assets have a nominal value way in excess of their real earnings potential, and that gap is hidden.
Phase Two: Transfer of the deficit of those assets to state budgets under emergency conditions. Private insolvency becomes state liability, while the gap between nominal and real wealth remains open and is now visible.
Phase Three: Closing of the gap by a transfer of real funds from the public to states. This is achieved by means such as austerity, taxation, default, or inflation. These different options hurt or benefit different groups.
We’re in phase three, and the reason we have austerity in most of the West is that austerity is the method capital wants to see used to resolve the gap. Using austerity in this phase serves to consolidate the gains that speculators made in phase one, such that the whole cycle is a net transfer of funds from the general public to the speculators. Austerity is the “hard money” way to finish the cycle.
Using inflation (by printing money), taxation of capital gains, or controlled default would allow the gap to close by eroding rather than consolidating the false gains made in phase one. These options wouldn’t be clean but they would be fairer and less destructive of the real economy. These options are very unfriendly to capital, so they’re mostly absent from politics. The US Fed is using a small amount of inflation, presumably to reduce damage to the real economy, while the fabulously independent European Central Bank insists on a hard Euro and austerity. The ECB is working as intended, since the whole point of an independent central bank is to avoid stealth taxation of capital in situations like this. On the whole, current monetary policy is strongly in favor of wealth and against social cohesion or development.
Property means several things to people. It has at least three meanings:
Personal safety and dignity: My clothes, my house, my money, my computer. These are mine in the sense that I need them to go through life and I need reassurance nobody will take them away from me. Actually I don’t own my house, I prefer to focus on my skills. But it’s the same idea.
Control over resources: My project, my team, my blog, my plan. I want to control these things. If I had a business it could be my business in this sense of controlling what the business does. These things are controlled by me and I want them free from interference so that I can pursue my goals.
The right to exploit: My shares, my invention, my song, my contract, my land. These are artificial rights that let me exploit resources, or the activities of others. If the thing is mine I can take any profit I can extract from it as mine to keep. This type of property is an exemption from the duty to share.
Only the first two are natural. The first is needed to have a society with human rights, although the boundary could vary. For example some people feel a strong need to own their house, and some don’t. But a desire for security of your immediate needs is universal.
The second right, right to control resources and keep them free from interference, is needed to form an advanced economy. You can’t build any kind of elaborate production or a complex technological product like a plane if you can’t control the resources and the activities that bring it about. This type of property is the necessary foundation for firms. Even things that appear to be free are based on property as control. Google services are free, but they control the site and it’s designed so that you depend on it every day. Linux is free in the sense that someone could copy the bits and start a rival project, but the actual Linux project is well controlled.
Property as the right to exploit is different. There’s nothing intuitive or natural about it, except perhaps that it formalizes feelings like “survival of the fittest”. Normally, if you have an idea that is successful or as a group you produce valuable things, you share. When nature yields oil or fish again the normal thing is to share. Perhaps in these cases we have yet to discover how to do so in a controlled and equitable way. To these productive activities, property is an overlord. Property claims what would otherwise be shared among the people directly involved, for one or a few people who are distant. It’s no accident that most property of this type is indeed derived from lordship over land.
I don’t believe this idea that a firm exists to maximize shareholder returns. If the entire economy was structured on that principle, the world would be dominated by exploitative, rent-seeking organizations even more than it is.
The reason for a firm to exist, primarily and sufficiently, is to produce goods and services that are needed or desirable in the world. There are several ways of judging and directing the firm according to this principle.
The market is a very good indicator of what the world needs or wants, especially when it comes to the detailed and diverse wishes of individuals. It’s not sufficient, and certainly not right by definition, because the market is prone to manipulation, irrationality, and social injustice making the difference between true wishes and buying power.
Critical opinion, commentary, or goodwill towards a firm and its activities. It’s no accident that quality consumer goods firms are held in higher regard than most banks.
An objective analysis of the firm’s product and activities with respect to life, well-being, human fulfillment, and the environment.
Policy. Companies need to be comissioned to create large-scale infrastructure where the market would yield lower-investment, higher use cost solutions
A second reason for a firm to exist is to provide comfortable and fulfilling employment to the people directly involved in the firm. Balance is the measure here. The firm is not a vehicle to get rich, nor is crushing, subsistence-level employment a goal.
A good manager is someone who takes decisions that carry cost before the right decisions become obvious.
Anyone can take precautions if they have zero cost, of if they appear to have zero marginal cost. There is therefore a tendency to reduce the marginal cost of various precautions, processes, regular forums, documents, and the like by turning them into a running waste. That’s an attempt to make management easier, or more precisely to make bad management less distinguishable from good while sacrificing any efficiency.
Also, any vaguely competent functionary or committee can make tough decisions once the costs and benefits are unequivocally obvious. I once had a manager who, when faced with any important decision, asked his reports to gather all relevant information and present it in a table. He would only accept analysis that made the choice obvious, which is equivalent to saying he only made decisions of zero risk and zero marginal value.
The valuable work is to take decisions that are costly now to gain benefits or avoid risks that are as yet unseen in the future. The good manager is alone, or at least needs to have peers who are above the daily affairs of their team and are able to look into the longer horizon. Effective management has to be empowered, like business, so that risks and gains can be balamced and foresight applied.
The concept of a state that we’re carrying into the 21st century is out of date. We need to examine what a state is today and, to the extent that we need governance, what form a state should take in a globally connected world.
The state that we think we have, the nation state, has only had a short and brutish existence. European nation states took their present form in the 18th or 19th century. Before this there were other forms of governance — empires, city states, feudalism — with varying degrees of size, ethnic cohesion, strict or lax laws, open or closed borders, etc. The most striking difference though has been the relationship of people with government, ranging from equal partnership to open exploitation. The nation state brought three centuries of coercive policy making coupled with paternalistic welfare.
Today the nation state is in crisis, not so much because of open borders or because the clan wars that it caused threaten to tear the world apart, but because its social contract is in crisis. The modern state can neither enforce policy nor provide welfare with credibility, and we’re not collectively sure if it should. We need a clear model of the state and its role.
The core problem is that the Greek economy is unproductive in structure and ethos.
Greece will probably have to default against the debt market, if not now then later.
It would be better if the EU dealt with the issue instead, by taking over and restructuring some debt.
The EU should probably create a framework to deal with national solvency in a consolidated way.
Fortunately the Greek economy has poor coupling, and could be protected temporarily by price controls.
In the long run the solution is to make Greece more productive by fixing exactly that – creating high coupling of innovative firms with the international economy. The best way to do that is probably to create international economic zones, which work in English by Western rules.
Have you been to a movie recently? Do you get subjected to these industry warnings against unauthorised copying? Well, don’t know about you but they really put me off going to the cinema. These warning ads say to me “Go and watch free content on YouTube”. I get the same reaction when I hear about some industry lawsuit against a random citizen who was sharing music (or their kid was sharing music). The clear message is “Stay away from the recording industry and its products for the time being”.
Posted on LJ in July 2005. Not edited. If I had to leave behind just one political text, it would be this one.
Myth 1: Privatisation makes things efficient
Good management, consolidation, low corruption, and a strong drive to work (whether spontaneous or coercive), make things efficient. These factors may be present in private enterprises or state-managed ones (including science, military, transport, or healthcare). The converse problems may also plague both private and state enterprises.
The only parameters where there is an identifiable difference is corruption. Capitalism institutionalises the self-interest of managers and owners as a controlled (mostly) inefficiency called profit, whereas the same motives in public institutions result in unofficial profiteering called corruption. It’s debatable which kind of inefficiency is worst.
However, efficiency is an academic point or a red herring. The main purpose of privatisation is to increase the value of money, by allowing wealthy individuals to buy high-quality services without having to subsidise similar, or indeed any, services for the majority. Education, transport, and healthcare are the most common examples. Once private services are established, political pressure from the rich to scale down and gradually abandon the public systems is inevitable, and usually results in a two-tier system. Maybe this is “efficient” in the sense that the system only has to provide good services to a few people.
A second purpose of privatisation is to increase the value of capital by replacing nominally efficient (non-profit), in practice somewhat corrupt enterprises with officially exploitative (profit-oriented) ones. This process thus expands the scope of capitalism to the detriment of consumers. In developed countries the rich feel they can tolerate this cost as consumers, and in poor countries it’s not their problem.
Fascists are like rats. Once you see them rally in the public square you're left knowing that they are hiding in the surrounding buildings, and there's little you can do about it.
2011-07-31
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