Corporations and governments: can’t have one without the other

Considering some of the shouting, one might think that politics has divided into two camps: government is bad and corporations are for the common good, or corporations are greedy and government is for the common good.

As too often is the case, the truth lies somewhere in the middle.

First, let’s look at the similarities.

Corporations and governments are organized by people for a large number of reasons.  The people who organize these entities do so to provide goods and services, to make money, to be famous, or to push certain views, both altruistic and selfish.  Neither type of organization is any better than the people who run the organization.  Success depends more on the leadership and the resources available than on the form.  Success also depends on the circumstances of the time.  If a large segment of the population is not interested in an idea, it will take a lot of effort to promote the idea, whether a new product or a new law.  On the other hand, if a very large segment of the population is interested in an idea, somebody in corporations or government will be working overtime to fulfill the population’s wishes.

The big difference is that the corporations are run by the few and governments are run by the many, if the many show up and vote.

As many misinterpret Adam Smith’s “invisible hand”, many misinterpret Milton Friedman’s the only purpose of a corporation is to “increase profits”.

“[t]here is one and only one social responsibility of business–to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud."  - Milton Friedman, “The Social Responsibility of Business is to Increase its Profits”, The New York Times Magazine, September 13, 1970

Many interpret this as the only purpose of a corporation is to increase shareholder value.  Unfortunately, they ignore “rules of the game” and “without deception or fraud”.  But what is shareholder value?  Is it a continued gain in stock price?  Is it a continuous stream of increasing dividends?  Or could it be the long-term provision of a good or service?  For example, do investors want to create a product that could take years to bring to market?  Do investors want to insure that medical services can be provided to a community for decades rather than maximize profits for the short-term and destroy the community long-term?

Many point to the problems of MNSure and ObamaCare as examples of government inefficiency.  But guess who provided the computers and software for these health insurance programs?  Private companies!

And private companies have not been known for efficient, trouble-free rollouts of new products.  How many auto recalls are there every year?  Has every computer program or system you purchased or downloaded been free of bugs?  It seems every time I get a notice of an app update, the description includes “bug fixes”.

In the “bad old days” of mainframes, it was really a major milestone when a computer ran a whole day without a crash.  Now things are much better.  My laptop, which is more powerful than any mainframe I worked on, might go a whole week without some kind of frustrating error, including freezes.

MNSure and Obamacare are massive systems requiring massive co-ordination of many pieces.  As we don’t give up on our computers, we shouldn’t give up on massive projects that don’t work perfectly on the first day.

"I'm as confident of this as I would be that when the first cars didn't work well, it wasn't time to return to horses and buggies; it was time to improve the cars. This is the new technology; there are kinks to it and it's going to take some time to work them out.”
Joel Ario, quoted in “Contractor’s report slams MNsure weaknesses, readiness”, Elizabeth Stawicki, MPRNews, 2014-06-18

Are you collecting Social Security?  Is your check posted to your bank account on the promised day every month?  But it was not always so.  Like getting computers to not crash, the rollout of Social Security was not without glitches or without critics who claimed dire consequences.  Like “nationalization of wheat fields would soon follow” and Americans would be reduced to passive servility.  It would take forty years of tinkering to have ninety percent of Americans covered by Social Security.

See “What about Social Security’s rollout?” Bruce J. Schulman, 2013-10-29, Reuters

An interesting contrast to the call for less regulation and taxes is the call by some of the same people for government subsidy.  How many stadiums for billionaires have been built without government subsidies?  How many companies have chased after the best subsidies and tax breaks to determine the location of a new office or factory?  Are these the same people who say government shouldn’t be picking winners and losers?

Consider the big howl from Congress when Solyndra collapsed.  But nothing was said about the success of Tesla.  Both received start-up subsidies from the Federal government.  Tesla paid its loans back!  Also among those who received subsidies were Compaq, Intel, and Apple.  Now Apple is the largest company in the world in capitalization!  And looking for ways to avoid paying back its benefactor through taxes.

For a lot more on how government has fostered many other successful innovations, see “The Innovative State: Governments Should Make Markets, Not Just Fix Them”, Mariana Mazzucato, Foreign Affairs, January/February 2015.

- Mel wishes a few far-sighted Republicans and Democrats would start a Pragmatic Party.

This was also published in the Duluth Reader, 2015-03-26 at 2015/03/26/5005_corporations_and_governments_cant_have_one_without

School choice and the free market

School choice and the free market
Melvyn D. Magree
Originally published in
the Northland Reader
now the
Reader Weekly
"School choice...whatta concept"
February 17, 2000

 Posted in blog 2014-09-16

In the debate about “school choice” the phrases “let the free market decide” and “competition will bring out the best” are often used.  What are “the free market” and “competition”?  Is “school choice” an issue that can best be determined by “the free market” or “competition”?

The definition of an ideal free market includes

• Large number of buyers and sellers
• Free entry and exit of the market
• Knowledge of all relevant prices
• All goods are “private goods”; all the benefits and all the costs are reflected in the price

“School choice” certainly involves a large number of buyers.  Students in a given urban community number in the thousands.  In an ideal market a large number of buyers would lead to a large number of sellers.

Children are required to enter the market for schools, and they aren’t free to exit it.  Even if they were to change to another school, it would be difficult to do so for many reasons until the end of a school year.  Schools take a bit of time to enter or exit the market, but many businesses do so also.

Parents and children may be able to get lists of prices of all the schools, but it is very difficult for parents and children to know all features of all schools.  The price is not only money but quality and quantity of services.

The costs of schools may be reflected in the price of tuition, but the benefits go far beyond those paying the price.  Not only do the children and the parents benefit from school, but the society at large benefits.  Companies have workers that communicate and reason well.  The community and the nation have people who can produce products, services, and ideas.  Neighbors have interesting friends.  The city, the county, and the state have informed voters.  In other words, education is not a “private good” but a “public good”.

Economists define a “public good” as being non-rival, prohibitively expensive, or having benefits that are not limited to the buyer.

A non-rival good is one that can be used by many people at the same time.  It is also available not just to the highest bidder, but to all regardless of ability to pay.

A prohibitively expensive good costs more than one person or group wants to pay.  Few people can afford all the costs of education.  Even private schools do not charge the full costs; they have endowments, scholarship funds, and general contributions.

As discussed earlier, many people benefit from an educated society, not just parents and students “buying” an education.

If something is a public good benefitting a large portion of the community, then it generally seems fair that the public pays through taxation.  If the public pays for something then the public would like to have some say in what the public good is like and how much it costs.  The most satisfactory means of expressing the public will for over 200 years has been democratic representation.  The public elects representatives charged with certain responsibilities.  The representatives determine the nature of the public good, what is an acceptable cost for the public good, and how to raise the funds to pay for it.

The representatives could decide to provide the public good through a government agency or subsidize it through a contractor.  If a government agency provides the public good, then the representatives generally do not provide subsidies for alternative provisions.  For example, if the government has a police or fire department it does not provide a subsidy for those who would have their own police or firefighters.  Should education be any different?

If schools are to be subsidized, should there be only one contractor or many?  The other argument for “school choice”, “competition,” implies that there should be many contractors for schools.  What does competition lead to?

“Competition” implies schools have competition for buyers; that is, buyers select a school.  But the reality is that students compete for private schools; the schools select the buyers.  All of the buyers cannot select the school that meets their needs.

If a product is more popular than competing products, the manufacturer can do two things: supply more product or raise prices.  If the manufacturer decides to supply more product it may be able to do so quickly.  If it decides to raise prices, some buyers may decide to go elsewhere but the manufacturer will probably retain enough buyers to have a satisfactory profit for some time or to have more money to put into improving the product.

But if a school is more popular than its capacity, it cannot meet that demand for a year or more.  Should it then raise its prices to have a higher profit or to fund additional improvements in the school?

Now if the public is going to pay for such a school through vouchers, does it pay the full cost asked by the school?  Or does it pay only a certain minimum that is guaranteed to all students.

In the first case we get into another economic idea, efficiency.  One kind of economic efficiency is low cost production.  That is, a free market will reward the lowest cost producers and punish the highest cost producers.  But if a voucher pays the price asked for by a high cost producer, do we have a free market?

On the other hand, if a voucher pays only a guaranteed minimum, then it reduces the number of buyers.  Only the children of those families who can afford to pay the difference can go to the very selective schools.  “School choice” becomes limited for the rest of the children.

©2000, 2004, 2007 Melvyn D. Magree

keywords: Melvyn Magree, Melvyn D. Magree, Party of One, Reader Weekly, school choice, free market, public goods, public schools, fire department, police department, vouchers, competition

Quote of the day - Competition

"When, for instance, competition laws are not enforced, monopolies grow, and with them the income of monopolists. Competition, by contrast, drives profits down." - "Some Are More Unequal Than Others", Joseph E. Stiglitz, New York Times 2012-10-26

The article relates how the oligopolists are over and over driving down their costs, including taxes and wages, and increasing their profits.

My thought is that there may be a time when there are no profits to made because few can afford to buy the oligopolists' products and services and there will be insufficient qualified employees because there were insufficient taxes to educate a large number of people.

See "fastest to ruin" quote in "The Invisible Adam Smith".

Free markets for big corporations but not others

The Senate defeated a measure to block new FCC rules on net neutrality; that is, providers could not or give priority to their own content or block competitors.

"[Sen. Kay Bailey] Hutchinson said the rules were yet another example of the 'Obama administration's relentless imposition of new and destructive regulations... (that) are freezing our economy.' "Senate defeats effort to block Internet rules", Reuters, 2011-11-10.

Duh, Senator, aren't monopolists the ones freezing our economy?

MyNation wins Tiddly-Winks championship

When I saw the New York Times headline, "Germany Wins Women's World Cup Again", I thought all Germans won the World Cup? No, some German's won the Women's Soccer World Cup. Undoubtedly many supported this team, if not in money or attendance, at least in spirit. That can give a team drive, but how much real contribution did all Germans make to the team's success.

Somehow, it seems ludicrous to me that one should automatically have great loyalty to a sports team because they "represent" a geographical area, be it one high school of many in a town or be it one team selected from many from a country. When I watch a sports events, which is generally because my host has not given me much choice, I cheer for all contenders. I feel great when someone makes a great play and I feel down when someone makes a mistake, whatever side they are on.

It may be a good substitute for war or other strife, like the Iraqi team winning the Asia cup. Unfortunately, few of the Iraqi team actually lived in Iraq; it's too dangerous for men in shorts. But it did momentarily give many Iraqis a feeling of unity beyond the daily violence.

Ideally, we would work more on co-operative efforts rather than competitive efforts. We do see that in business where companies form alliances across borders to produce a product or service. Too bad these don't generate the excitement and attention that "high-level" sports events do.