Private & public goods
Hector McNeill1
SEEL
Keeping things in focus:- Recently Jeremy Corbyn raised a question as to the modern relevance of a Clause IV-type role for certain decisions under a future Labour government. With a bent on candor Jeremy Corbyn has opened, what is for many, a Pandora's box inviting the normal tsunami negative and positive response in the media as well as within the Labour party. Many do not appear to be aware of why Clause IV was abandoned or of the direct influence of the New Marxists on shaping New Labour. This is discussed in the article Clause IV and all that..
This topic needs to be reviewed in a more mature way and preferably from the standpoint of constitutional economics where private goods and public goods have well-established complementary roles in a balanced economic system. This article addresses these issues.
The constitutional economic context
James M. Buchanan
1919-2013 |
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James Buchanan (see The Importance of Constitutional Economics) was of the opinion that Paul Samuelson, of MIT, did important work in the 1950s on developing a taxonomy to classify types of goods in markets in relation to private divisible goods valued by individuals and public goods which we commonly considered to be useful and non-partitionable. Public goods are non-exclusive and not costless and yet most in society agreed on the need to have them. A good example mentioned by Buchanan is that law and regulations are an important public good, designed and recognized by all to protect everyone.
Within the context of the Real Incomes approach, the underlying concern is the efficiency and effectiveness of economic activities in supporting the growth in real incomes through policies that achieve a positive systemic consistency (see Positive Systemic Consistency), that is, all constituents benefit from policy.
In the trade-off between avoiding monopolies and yet gaining advantages from returns to scale of operations the infrastructural elements of an economy including the utilities energy, water, telecommunications and transport and the care sector including health and provisions for the elderly, are obvious examples where lower unit prices can benefit all economic and social constituents.
Paul A. Samuelson
1915-2009 |
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Efficiency and effectiveness
There is a belief that operations that are driven by the profit motive are more effective and efficient than activities managed by the state. However, the conflicting constraints imposed on resource allocation by the profit-paradox (see The profit paradox), the fiscal paradox (see The fiscal paradox) and the monetary paradox (see The monetary paradox), the private sector is not as efficient or as effective as it could be.
In terms of organizations that do not place shareholder profit as a first priority, such as mutual organizations, that is, economic units owned by their participants, their efficiency compares favourably with profit-based companies. A good example is Building Societies whose costs of operation are around 35%-35% lower than profit making banks who need to satisfy shareholders looking for dividends (see The benefits of mutualization in mortgage lending). In the case of utilities and the care sector one can look back at the previous concepts of state-ownership and operation, broadly nominated as "nationalised industries". These were effective, that is, they did the job, but they were not very efficient.
The growth in financialization since the 1970s has resulted in financial productivity becoming an important motivation for private sector management, so much so that recently in excess of 50% of stock market activities results from banks and corporations purchasing their own shares using low interest money under quantitative easing, to push up share prices and stock markets, to thereby benefit from "higher returns" which in basic productivity terms, do not exist. As a result, private sectors are suffering from insufficient investment, falling productivity but higher monetary returns.
The broader role of mutuality
People who work within their own business are directly interested in the sustainability of the enterprise and understand that competitive advantage is a key factor in securing a future with employment. Whereas most mutuals are localised like the building societies were there is a significant potential for mega or national mutuals as a more rational option to a direct government ownership which lack the incentive structures to maintain innovation and improving productivity. As demonstrated by the building society and private bank comparison, banks cannot compete with the mutual model. The same would be true in any other economic activity. The question is why use a mutual model? There are important fundamental questions related to an overall social and economic strategy where the relative benefits of the profit incentive and mutual concern are important. For example in the care sectors it is important for the professional aspects of the activity to function in the direct interest of the customers, that costs and profit are not the primary considerations in the decision analysis leading to a suitable treatment. The Blair governments introduced "performance indicators" leading to many cases of bizarre treatment of patients and an unacceptable lowering of professional treatment standards. Similarly, the rapid expansion of so-called "justice services"2 has only provided a strong lobby for legislation that facilitates the imprisonment of members of the public to the benefit of the private corporations who run the prisons and other aspects of probation and some social services. Broadly speaking placing the "market" or the "profit motive" into the decision analysis of medical professionals is a disaster and an unacceptable evolution in a caring society. The retort to the last few sentences is that it is naive to think any activity can escape the realities of economics. This is true but the problem is that the broader infrastructures and even policy procedures combine to make the private options even less efficient. Indeed, many private sector companies see government contracts as a way to secure an easy cash flow with little effort. On the other hand, many ministry personnel have little appreciation for the need to spend public revenues carefully with budgets being essentially "nobody's money".
The role of the Real Incomes approach in promoting a mega or national mutual model
The Real Incomes approach through Price Performance Policy (PPP) increases the incentives for higher productivity and returns to economic activities whether they be in the private of public sector. Public goods and services, those considered to be non-partitionable and non-exclusive, should have a strategic role in lowering the costs of inputs to the whole economy. This is possible, especially in relation to the operation of infrastructural services including the utilities energy, water, telecommunications and transport and the care sector in its support of "human resources". PPP operates on the basis of an elimination of corporate taxation and a major shift in financial cash flow from profits to incomes, including those of employees. The result is an easier achievement of basic or living wages and a larger proportion of the working population being able to contribute to the payment of tax. Indeed, under PPP all government revenue comes from personal income taxation. This has two important effects. It removes any justification by companies to interfere in government policies since they don't contribute any funding to revenues and it augments the motivation for wage earners to:
- become more directly concerned in the decision making processes that manage the productivity of their places of employment
- have a more direct interest in contributing to the decisions on what and how government revenues should be spent
This can help improve the legitimacy of public choice, a central issue in constitutional economics, and encourage the political establishments to rearrange the process of democratic debate and elections to respond to an evolving preference for basing policy decision-making on a broader participatory approach.
The profit motive and competition
The last ditch attempt to undermine the PPP approach is to first of all not read what it is and secondly to declare that without competition the economy will be inefficient because there are no incentives. Why even Adam Smith would oppose this with his bent on each pursuing their own interest leading to the evolution of the economy under the guidance of the "hidden hand". Surely we all benefit from markets where the name of the game is the Darwinian concept of the survival of the fittest?
PPP provides a direct incentive to managers, shareholders and employees to support decisions that augment productivity on the basis of actual, and not paper, moderations or reductions in unit output prices. The degree to which enterprises succeed in achieving this leads to their paying lower Price Performance Levies so as to increase their margins. However, the margins are no longer "profits" but incomes of shareholders, managers and employees. Changes in the accountancy components substitute profits by investment in technology and human resources and returns on investment are measured in terms of incomes of shareholders, managers and employees. The degree to which a company reduces their Price Performance Levy, this can in fact be brought down to zero, releases funds all of which are paid as productivity bonuses to all associated with a company in proportion to their pay scale. Therefore the incentive to increase productivity, measured by a company's Price Performance Ratio (PPR) creates an incentive to set prices at competitive levels and even to reduce unit prices. The fact that profits are reduced as unit prices are lowered leads to a reality that, depending on the price elasticity of consumption (pEc), the company operating on the basis of profit cannot compete with a company operating under PPP. This is the reality. The limitations on unit price competition is the physical productivity of production processes or services and not "the market" or "demand" since the market is established by price-setters who, through supply side management decisions and actions, generate consumption because of the enhanced real incomes or purchasing power of consumers resulting from lower unit prices. Those associated with companies gaining PPP PPL bonuses also gain in real income terms and overall unit price inflation is curtailed resulting in a stablization or enhancement in the value of the currency.
PPP has always been designed to ensure that public services be subject to the same policy incentives and operational procedures as private services (see Public service provisions). As a result public services are reborn with internal incentives based on productivity but without the clinical impersonal tendencies to see customers or patients as numbers or "resources" that contribute to profit. PPP can help establish the mega mutuals or national mutuals that represent a
Our weapon of mass destruction |
practical and operationally transparent solution to Clause IV and without the more unfortunate details that were witnessed in the 1970s. Economic theory and practice has evolved significantly since then and the Real Incomes approach is part of this continuing and exciting evolution. Jeremy Corbyn's desire to revisit Clause IV isn't an invitation to chaos but, it would seem, is an admission of the need for a more rational decision analysis to identify more acceptable efficient and effective solutions to the issues facing the country. This has to involve bringing our understanding of the state of knowledge on current economic thinking up to speed rather than reverting to outdated conventional economic theories and practice.
The confusion on the part of the other Labour candidates for leadership surfaces in their reference to Corbyn's stand as being "retro" or "taking us back" to a failed system. The system failed because of polarized points of view that were intensified by the lack of known economic theoretical and policy options at that time. The candidates seem to justify their own positions in terms of failed conventional policy options. Understanding the old objectives and modern economic theory shows up the limitations of current conventional policies including those adhered to by the government and all other British political parties. The younger leadership candidates seem to be genuinely confused and it is disappointing to witness their inflexibility and lack of knowledge of the current state of economic theory and practice; it hampers their ability to think on their feet.
We all need to move with the times to rid ourselves of this ridiculous binary view of the options so as to shape a better future.
1 Hector McNeill is director of SEEL-Systems Engineering Economic Lab.
2 See: McNeill, H.W., "The Briton's Quest for Freedom - Our unfinished journey...'", Chapter 10 Juries, section: "But there is another special interest group", page 103, HPC, 418 pp., 2007. ISBN: 978-0-907833-01-7. page 103
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