Ezra Klein interviews Tom Coburn

[Ryan Thunder]

(1) We'd better pay them salaries competitive with Wall Street salaries or they'll take what they learn and go to Wall Street.

Or you could regulate your wall street street salaries down to something not totally absurd.

[Simon_Jester]

Even if you did that, you'd still need to pay them competitive salaries, and realistically those are going to be high- but a damn sight cheaper than the cost of not having them, I think.

I mean, why would we expect the social utility of having one more person who can watch Wall Street to be that much less than having one person who can work on Wall Street? Are we normally in the habit of paying police officers less than petty criminals make? I'll grant that normal mafia-style racketeers may make more money than the FBI agents who go after them, but that's only when you count the bosses- not everyone in the mob is a boss.

[Surlethe]

Sorry, don't have the patience to do two long replies. I'll try to get to this later this evening or tomorrow.

[Surlethe]

Simon_Jester:

Now, you can say "Well, then people who live in rural areas should have to pay a premium for a private postal company to do the work of delivering the mail out to a town fifty miles from the middle of nowhere." And that would be a great idea if, as a civilization, we'd already decided everyone was supposed to move to an arcology-city. But we haven't settled on something like that, and the people who live in remote areas still have a reasonable right to be able to physically send mail to people in other places without having to hand-deliver it to a FedEx office in the nearest city a hundred miles away themselves.

You can sort of look at this and say it's not a problem, it's all right if postal service to half of North Dakota gets canceled as "inefficient" or if the rates are cranked up until mailing a letter costs two dollars. But when you do that, and when you make similar choices to privatize a lot of other infrastructure, you're making a set of choices that I think a lot of people with libertarian leanings hide from themselves.

I don't know that I've hidden it from myself ... . It's right out there in the open: people in poor, rural areas don't produce enough, don't contribute enough to society, to justify the cost of providing this service. You summarized it reasonably well below.

If I choose this route and follow it to its logical conclusion, I'm making the choice to abandon or marginalize ways of life that take more effort to maintain. Everyone is penalized if they don't live in whatever way it is most convenient for the state/company/whatever. And only the cash value of a thing is measured when I figure out what convenience means, and what is penalized- preferences don't count, except insofar as people are willing and able to pay to get their preferences fulfilled.

Right, that's exactly right. Except for "most convenient for the state/company/whatever" --- I'd really say "most convenient for society at large."

I don't like that because I don't trust "number of dollars" as a substitute for measuring how much inherent utility a way of life, or a product, or a service, or an idea has. From a utilitarian point of view, that's a very dangerous shortcut because there are so many things we can think of off the top of our heads that money can't buy, or that matter just as much for someone with little money as for a lot of money, or that money could buy but that people don't voluntarily pay for even when they very much want to have it. Everyone wants to have breathable air- no one volunteers to pay for it, and there's no way to limit breathable air to the paying clients without asphyxiating all the hobos, so it can't be privatized worth a damn.

First, air is a horrible example. Use a private good instead of a public good to make your point. Second, frankly, I don't see any better way than "$ willing to spend" to measure utility. As long as we keep a close watch on the ways it can go wrong --- for example, with very high income inequality, or with inconsistent time preferences, public goods and natural monopolies, etc. --- we should use the price that someone's willing to pay for X as a proxy for how much they value X. I mean, do you have a better way to measure utility than how much people are willing to give up?

On regulation- I am increasingly skeptical of the laissez-faire approach to finance, because I'm having a hard time seeing what it's good for. You cannot increase the amount of goods and services in an economy indefinitely just by folding money into elaborate origami shapes. At some point, it stops being a mechanism for ensuring that the things we need done are properly funded, and becomes an elaborate game by which the financiers can increase their share of control over what is done.

I don't really see them as increasing their share of control. My interpretation of that "origami folding" is just the financiers looking for more ways to distribute risk and returns, so that it's diluted and not focused. But I don't see how it increases their "control" of the economy. Anyway, I think we should set up the safety net and the Fed's policy so that financial panics don't wreck the economy and screw over millions of people, so if there's a financial panic we can just let it work its way through the system. If the bankers want to play with fire, fine; set up the system so they can get burnt without burning down their neighbors' houses.

Again, this is a policy decision we should make consciously as a civilization, that many people with libertarian leanings brush over: should we give that class of people that kind of power? If so, how much? What are the checks and balances on them, short of having to throw a revolution just to assert control over the system?

I have yet to see a satisfactory reason not to think the answer is "no, we shouldn't hand over that kind of power without accountability." If that requires a brute force and restrictive system of regulation that clips the wings of Wall Street financiers... are you sure we can't live with that better than we can live with the consequences of signing over the power to shape the economy to the massed Ouija-style unplanned actions of our nation's billionaires?

Unplanned is better than poorly planned. But I think this ties in with your last point below, so I'll just roll my answer in down there.

On efficiency and a few other things, I want to quote this specifically:

So I'd appreciate it if you'd unpack that term "efficient" for me, if you're going to make it a core of your argument.

Some variation on "maximize overall utility over all time." So, something like producing as much as possible and allocating those goods and services to the people who want them the most, with some suitable weight placed on the wants of people in the future as well.

The problem is there's nothing in the free market to weight the wants of people in the future, and very little to weight the wants of people equally if those people happen to have different amounts of cash on hand. And, again, there's a ton of intangible things that the market is incredibly bad at evaluating: try to work out the free market value of a newborn child, and get back to me if you can come up with a logically coherent explanation for why the market will value that child as they ought to be valued.

Actually, you're wrong about the free market being unable to weight the wants of people in the future. Look at commodities futures. And it's an interesting exercise to work out the value of a newborn child --- we can get a lower bound by looking at the average cost of adoption, or the average cost of pregnancy and delivery. (If you want, I can give you specifics in a few weeks. ) But again, I get stuck on the "ought to be" part: do you have any better way of measuring utility than using the (admittedly imperfect) market value?

As an aside,

This is why it's dismaying when, say, the city of Chicago sells off the right to collect parking fees to a private corporation in exchange for a lump sum up front to help them weather the recession.

That was probably the right thing to do. Parking in cities is usually radically underpriced, so much so that people spend lots of extra time driving around and looking for parking spots, clogging up roads, and polluting. These are externalities that the city governments haven't historically taken into account when pricing, so in this case the private monopoly price is probably more efficient than publicly set prices.

It also prices certain groups of people out of the market for access to certain public spaces, and turns a public revenue source (which can be used for whatever the citizenry needs later) into a private revenue source (which will mostly go to whatever the heck the company wants).

To me these are drawbacks; I think there's a lot to be said for the idea of the right to the city: the right to make decisions about how the city is going to evolve, rather than having those decisions be made for us by Darwinian processes. Especially not Darwinian processes which are easily shaped by people who are powerful now to ensure that they remain powerful later, since the decision "who has the power?" is one of the most important of all.

The people you're worried about pricing out of the market weren't driving cars to begin with. They were taking public transportation and walking. I also think that you have to compare the lost revenue to the gains from better health and easier transportation through the city (and I am pretty sure that the parking meter company is also paying the city for the privilege, probably more revenue than the city was getting from the meters while it administered them). As far as making decisions about how the city is going to evolve, I think you're probably overestimating how much control powerful people have over the process. In this particular case, higher parking prices in the city are probably beneficial to its future since they will force the city to evolve toward higher density, will limit sprawl, will encourage denuclearization of commerce, and will encourage better public transit.

Coal plants are easier to build quickly, yes, so they make sense as a (literally) quick and dirty response to an energy crisis. Whereas hydroelectric dams make more sense if you anticipate a long term rise in demand that isn't urgent right now.

Unfortunately, this also short-circuits the policy decision of how the country should generate power, whether it makes more sense to emphasize energy conservation now and gradual buildup of sustainable power sources to meet demand instead of a sudden surge in production. Hopefully the market will produce consistent right answers that don't artificially discount pesky nuisances in the future like "peak oil," "global warming," and "acid rain..." but I'm really not optimistic. Maybe I should be.

I don't think that the market artificially discounts things like peak oil, which deal with private goods. Global warming and acid rain are great examples of places where the government has natural and urgent business intervening, but even there I think the government should make use of the market's ability to coordinate without planning costs. Anyway, the point of the coal planning example was just that the private firm is subject to different incentives, which may let it see higher-utility endeavors than the government.

Perhaps this is simply a pathological thing on my part- that when I see no one making decisions about grand policy, I expect about the same results I'd expect from a large piece of machinery with nothing at the controls.

This is the point I was referring earlier. I think it's better to think of the economy as an evolving biological system than as a large piece of machinery. If you don't have a grand directing policy in place, it will still self-coordinate and grow. (Look, for example, at how economies worked before governments were capable of having a grand directing policy, in the West before about 1920.) In fact, I think it's often better to leave the economy mostly unplanned rather than highly, but poorly, planned. It is not possible to get enough information to create and implement a useful and utility-maximizing grand plan for the economy. Likewise, it's not possible for any single person or organization (except maybe the government) to direct the economy, so I'm not so worried about "control" being in the wrong hands.

[Surlethe]

(I am writing on a response to Spoonist right now, then one to D. Turtle. Even churning out mediocre responses is a big timesink, so again don't take it personally if I don't respond for a while.)

[Spoonist]

(I am writing on a response to Spoonist right now, then one to D. Turtle. Even churning out mediocre responses is a big timesink, so again don't take it personally if I don't respond for a while.)

No problem at all. Especially with the new addition.

I also think that over half of my stuff can be ignored since its rants and not dialog.

[Surlethe]

Spoonist:

Financial regulation:

I know I'm out of the mainstream in the US on this. If the central bank keeps AD from collapsing, unemployment won't rise, so the safety net will still function. Financial panics will also not be so bad, since asset prices won't fall precipitously. Even if a financial firm is huge, say 10-20% of the financial market, bankruptcy doesn't mean its assets vanish; they are just transferred to other firms. If the liquidation of its debts depresses the money supply, as long as the central bank is doing its job, it will push the money supply back up and mitigate any impacts on income. The recession of 2008 was a great example of governments doing exactly the opposite of what I propose: central banks letting income collapse, which made the financial panic worse and threw workers out of jobs, forcing austerity and thus undermining the safety net. The governments which avoided the collapse either had a social contract which allows wage cuts (Germany) or kept incomes growing at pre-2008 trend (Sweden, I think), or both.

If our central banks won't do their jobs, the next best thing is to nationalize the banks and regulate the fuck out of the financial industry. But if the central banks do their jobs, and bankruptcy proceedings are efficient, then there aren't any major externalities to financial panics, there isn't any "too big to fail," and so there's not really any reason to try to externally regulate the financial industry against anything other than outright fraud. Even if a bank holds 10-20% of the financial markets, its assets don't just magically vanish; they're sold off to competitors. Given a central bank doing its job, its creditors taking a haircut won't impact incomes. So, again, no "too big to fail."

As far as the interconnectivity of the world economy, if the central banks of other countries let their economies collapse, it won't really matter; there will be a negative real shock, but as long as domestic incomes keep growing at a steady pace, workers will shift from export industries to domestic industries, like how the housing crash of 2006 did nothing to US unemployment.

Corruption and governance:

I think it's really great that the "corruption and cronyism" you described is actually capable of provoking a scandal. That's part of the culture that leads to what I'd call "good governance." I'd also lump in attributes like "not having factions pulling in two directions", as you describe with the USPS, the inability to keep secrets from leaking, and a bureaucracy capable of running an income tax statement like you describe as "good governance." The difference in scale and the fact that the US is corrupt means that, relatively speaking, Sweden has "good governance."

Publicly owned firms:

First, I'm not sure what you mean by bringing up R&D in response to institutional inertia.

Second, on pricing, that most of the world's economists (especially liberal, and even conservative ones) agree that markets set prices to equilibrium should be evidence to you and me, non-economists, that markets actually do reach price equilibrium. As I said to Simon_Jester, I don't really see a better way of measuring what something is "worth" than looking at its free-market price. I'd define "worth" as "what a person who owns it can get for it," with the usual caveats about distortions from income distribution, etc.

But anyway, the point about efficiency is that, not being subject to market forces, a publicly owned firm is likely to malinvest and detract from future growth. The example of the USSR was to point this out. Good governance could mitigate this by examining the economy's structure carefully, rather than being directed by various interests. So I don't see how oligarchs vs Putin is relevant.

I am not really sure how comparing use of state-owned infrastructure is relevant. I agree about political goals versus commercial goals, but as I said to Simon_Jester, to the extent that commercial goals result in higher overall utility, we should make our political goals align with commercial goals. Why should high-population regions subsidize the higher-cost lifestyle of low-population regions? It's less efficient, since the low-population regions aren't producing enough for society to justify the expense of connecting them to postal service.

Hydro:

We can tell two stories about why no private companies are investing in it, if hydro is in fact long-run profitable. Your story about firm management is plausible. But I'd also ask whether the long-run profitability of hydro has been compared to other similar investment opportunities, or its present value computed? There's also the possibility of extra regulatory costs: in the US, I have heard horror stories about taking 30-some years to get permits to open offshore wind farms, or the possible extinction of a single endangered species stopping the development of large, profitable hydroelectric installments.

I think I got everything.

[Surlethe]

D. Turtle:

Pointing out the difference between credits and actual taxes is good. I will have to think about that. Anyway, the OECD study I was referring to when I said the US had a much more progressive income tax than other OECD nations indicates that spending has a much greater impact on inequality than the tax code. Other countries spend on social programs that mitigate inequality, while the US spends on the military and on distribution from young people to old people. This is why I say that if you really want to fix inequality in the US, don't try to make the income tax code more progressive without taxing the middle class more. Instead, fix our spending priorities: less on bombing poor middle-eastern countries, less taking from poor young people and giving to wealthy old people, more giving to poor people.

[D.Turtle]

D. Turtle:

Pointing out the difference between credits and actual taxes is good. I will have to think about that. Anyway, the OECD study I was referring to when I said the US had a much more progressive income tax than other OECD nations indicates that spending has a much greater impact on inequality than the tax code. Other countries spend on social programs that mitigate inequality, while the US spends on the military and on distribution from young people to old people. This is why I say that if you really want to fix inequality in the US, don't try to make the income tax code more progressive without taxing the middle class more. Instead, fix our spending priorities: less on bombing poor middle-eastern countries, less taking from poor young people and giving to wealthy old people, more giving to poor people.

Hmm, yes an explanation would be that while income taxes are more progressive, the rest of the tax structure isn't - and spending definitely isn't.

I fucking hate the equivalency of income tax with tax that has happened in the US.

[Thanas]

The governments which avoided the collapse either had a social contract which allows wage cuts (Germany)

This is incorrect. There were no wage cuts in Germany during the crisis.

I think it's really great that the "corruption and cronyism" you described is actually capable of provoking a scandal. That's part of the culture that leads to what I'd call "good governance." I'd also lump in attributes like "not having factions pulling in two directions", as you describe with the USPS, the inability to keep secrets from leaking, and a bureaucracy capable of running an income tax statement like you describe as "good governance." The difference in scale and the fact that the US is corrupt means that, relatively speaking, Sweden has "good governance."

The US corrupton is a direct outflux of the free market and deregulation.

But anyway, the point about efficiency is that, not being subject to market forces, a publicly owned firm is likely to malinvest and detract from future growth. The example of the USSR was to point this out. Good governance could mitigate this by examining the economy's structure carefully, rather than being directed by various interests. So I don't see how oligarchs vs Putin is relevant.

For every USSR there are multiple examples of publicly owned companies doing a decent job or even growing. Who are the world's two largest logistic concern right now? Deutsche Post and Deutsche Bahn. The first is a former public company which only could survive and expand due to its public ownership, the second still is a public company.

So no, being public and not being subject to market forces is not an automatic or even likely way into bad management or even bad future planning. In fact, without being publicly owned, Deutsche Bahn for example would be unable to plan in decades, not just quarters.

In fact, I would like for you to show that publicly owned firms are, on average, more likely to malinvest etc. This is an unproven assertion that flies in the face of several very prominent counter examples, so how about putting up some numbers?

[PhilosopherOfSorts]

"This is incorrect. There were no wage cuts in Germany during the crisis."


Was this because they were disallowed, or did they simply not occur?

[Thanas]

"This is incorrect. There were no wage cuts in Germany during the crisis."


Was this because they were disallowed, or did they simply not occur?

That depends on the specific contracts being signed with the unions. I do not think they occured, I assume he is confusing "wage cuts" with the state stepping in and making a pact with companies to continue paying people for doing less work (as less work was needed there some might have been layed off, but the companies hate losing qualified people and the state hates more unemployed, so they got together).

[Surlethe]

This is incorrect. There were no wage cuts in Germany during the crisis.

Really? I had heard that German unions agreed to wage cuts and the government stepped in with insurance to make up most of the lost wages, until the recession was over and firms could raise wages again. But I could have heard wrong; the only support for that I found was this. I may be thinking of what you describe, decreasing working hours and the state making up the difference. (A decrease in working hours is an wage cut.)

The US corrupton is a direct outflux of the free market and deregulation.

I doubt that.

For every USSR there are multiple examples of publicly owned companies doing a decent job or even growing. Who are the world's two largest logistic concern right now? Deutsche Post and Deutsche Bahn. The first is a former public company which only could survive and expand due to its public ownership, the second still is a public company.

So no, being public and not being subject to market forces is not an automatic or even likely way into bad management or even bad future planning. In fact, without being publicly owned, Deutsche Bahn for example would be unable to plan in decades, not just quarters.

What's your evidence that non-state corporations are unable to plan in decades?

In fact, I would like for you to show that publicly owned firms are, on average, more likely to malinvest etc. This is an unproven assertion that flies in the face of several very prominent counter examples, so how about putting up some numbers?

I don't see why I need to add to the experience of the entire communist bloc, which grew 1% (not annually!) during the entire 1970s. There you have economies which are populated by state-owned and state-run firms heavily malinvesting during the 1950s and 1960s. (My source for this, by the way, is Frieden, Global Capitalism: Its Fall and Rise During the Twentieth Century. I can include page numbers if you'd like.) Why is this not evidence to balance your two examples?

But if you insist, consider these:

Boardman, Anthony E.; Vining, Aidan R. (1989) Ownership and Performance in Competitive Environments: A Comparison of the Performance of Private, Mixed, and State-Owned Enterprises:

The results provide evidence that after controlling for a wide variety of factors, large industrial MEs [mixed enterprises] and SOEs [state-owned enterprises] perform substantially worse than similar PCs [private corporations]. In terms of all profitability indicators, mixed enterprises perform no better and often worse than state-owned enterprises. In terms of sales per employee, MEs do better than SOEs, but in terms of sales per asset there is no substantial difference. These results indicate that there are performance differences between public and private companies in competitive environments.

Appears to be the first thorough empirical study in the literature.

Cull, Robert; Xu, Lixin Colin (2002) Bureaucrats, State Banks, and the Efficiency of Credit Allocation: The Experience of Chinese State-Owned Enterprises

We describe features of the Chinese financial system that inhibited effective financial intermediation from 1980 to 1994 and investigate whether, despite these impediments, bank finance flowed to state-owned enterprises with higher subsequent productivity than did direct government transfers. We find that it did, at least in the 1980s, and conclude that bank employees assessed SOE credit risks substantially better than did the bureaucrats responsible for allocating direct transfers. Banks imposed harder budget constraints on SOEs than bureaucrats, but those constraints softened as the 1990s progressed. As a result, increased bank finance did not flow to relatively productive SOEs later in the period.

(That is, private funding is better at finding profit than publicly provided funding.)

Morgan, W. Douglas (1977) Investor Owned vs. Publicly Owned Water Agencies: An Evaluation of the Property Rights Theory of the Firm

This paper has attempted to compare the cost structures of water agencies under two
alternative modes of ownership - public and investor owned. On the basis of the sample
used, investor owned water agencies appear to have lower cost structures. While the results
are interesting and confirm the property rights theory of the firm, several caveats
should be kept in mind. The sample is not randomly selected but limited to six states
where a large number of investor owned firms are located and fully report information in
the 1970 AWWA survey. The limited reporting of technical characteristics may mean that
variables are omitted because they were not collected and thus the total cost model is
misspecified. This suggests that further tests of this hypothesis should be done using
disaggregated cost data and additional independent variables, if available.

Obviously an incomplete study, but provides some support for the prevalent theory.

Since the property rights theory of the firm is the theory I was taught in university, I would be surprised if it were not at least indicated by the empirical literature.

[K. A. Pital]

Second, on pricing, that most of the world's economists (especially liberal, and even conservative ones) agree that markets set prices to equilibrium should be evidence to you and me, non-economists, that markets actually do reach price equilibrium. As I said to Simon_Jester, I don't really see a better way of measuring what something is "worth" than looking at its free-market price. I'd define "worth" as "what a person who owns it can get for it," with the usual caveats about distortions from income distribution, etc.

Actually, quite a few economists doubt that the market reaches a general equilibrium. Some doubt that even a partial one is reached. It is natural, because the failings of marginalism are all too obvious to ignore. I mean, when you've got data samples, and then you've got a theory (e.g. wages adjust on the basis of labour marginal product producing an equilibrium) and then it does not happen, Uncle Critical Rationalism tell you the theory needs some serious re-thinking. General equilibrium (and most of the stuff based on rational expectations) is based on assumptions which themselves do not stand the test of practice. Bounded rationality was a great step forward for modern economic studies, and yet people seem to insist on clinging to old models.

Considering the system is hierarchic, the buying power - always or almost always unequal, and the information asymmetry always (or almost always) present, it is hardly a good idea to call the market price of something being the "worth" of a thing, even if there's no better denominator. And, of course, lest we forget that small decisions accumulate. So you can't really even know what you lost while following the price as your guide.

The failure of equilibrium modelling seems to indicate that a better approach is needed. A disequilibrium one. But that absolutely terrifies economists, so I guess paradigm shifts will come only in time.

What's your evidence that non-state corporations are unable to plan in decades?

As a side note for this point (whatever Thanas may say), average private corporation lifetime (even that of a very large one) is around 25 years for the Dow leaders. Small fry lives much less. There are some tremendous examples of longetivity (Sumitomo), however, these corporations look much more like vast gigantic conglomerates with diverse investments and a "personnel first" priority, not like ultra-specialized megacorporations that live large only while their particular good or service is in high demand, and then decline and die.

It's right out there in the open: people in poor, rural areas don't produce enough, don't contribute enough to society, to justify the cost of providing this service. You summarized it reasonably well below.

That's a remarkably harsh approach to humanity. Humans have inherent value or "Who shall not work, shall eat neither"?

Actually, you're wrong about the free market being unable to weight the wants of people in the future.

Even if it were able to predict the future (which it can't), there are always events that alter the needs. Every event alters the need even while you don't know about it unfolding. You continue investing and then suddenly the bubble bursts. No one needs these capital investments, human settlements and even the humans themselves who were geared to become tools of extraction, humans who were brought there to work. Company towns are wiped out and the wind howls inside "sunk costs" - the price of trying to "anticipate" what people will want. Neither the market, nor any other system can predict the future.

Unless, of course, we are talking about abusive techniques such as "demand formation" by brainwashing ads and political propaganda, to make people actually do what you want them to do (lest your investment becomes useless like a lot of it does). This is called a self-fulfilling prophecy, and one fulfilled by messing with human brains.

As far as making decisions about how the city is going to evolve, I think you're probably overestimating how much control powerful people have over the process.

In the 1950's came Robert Moses, hacking at the community with what Moses himself described as "a meat ax" while building the Cross-Bronx Expressway. Neighborhoods that had been stable for most of the century dissolved, as the middle class fled and the poorest of the poor moved in. In the 1960's, landlords, insurance companies and banks left, too. In the 70's, fires were clearly visible from Yankee Stadium, as property owners cashed in on insurance and scavengers torched buildings to get at the copper wiring and pipes.

Powerful people and influential people do have a lot of control.

[Thanas]

This is incorrect. There were no wage cuts in Germany during the crisis.

Really? I had heard that German unions agreed to wage cuts and the government stepped in with insurance to make up most of the lost wages, until the recession was over and firms could raise wages again. But I could have heard wrong; the only support for that I found was this. I may be thinking of what you describe, decreasing working hours and the state making up the difference. (A decrease in working hours is an wage cut.)

No, it is not a wage cut, as the wage remains the same. The people paying it change, but the wage remains the same. And let us not kid ourselves, when you speak of wage cut you mean "worker receives less money".

The US corrupton is a direct outflux of the free market and deregulation.

I doubt that.

On the one side you've got a "regulation is the enemy of business. Do not have the big bad state interfere in our jobs".
On the other side you've got "do what you want but we will doublecheck your every move and fine you harshly if you break the law". Which approach is likely to lead to more corporate excess?

For every USSR there are multiple examples of publicly owned companies doing a decent job or even growing. Who are the world's two largest logistic concern right now? Deutsche Post and Deutsche Bahn. The first is a former public company which only could survive and expand due to its public ownership, the second still is a public company.

So no, being public and not being subject to market forces is not an automatic or even likely way into bad management or even bad future planning. In fact, without being publicly owned, Deutsche Bahn for example would be unable to plan in decades, not just quarters.

What's your evidence that non-state corporations are unable to plan in decades?

No, you don't get to pull this reversal of the burden of proof on me. You are a former mod here, you should know better. Deutsche Bahn was able to plan in terms of decades and as a result is a highly successful company which is the leading company in Europe (and the world's leading rail company). So please explain to me how they must automatically malinvest just because the owner happens to be the public. Public ownership btw does not mean "state interferes in every little detail", which seems to be the strawman you have erected in this thread, it merely means the public owns the firm and sets some broad ethical guidelines. Like "everybody should be able to afford his daily commute" and "we expect basic rail service to every part of the country". Outside of that Deutsche Bahn act just like every other company.

I don't see why I need to add to the experience of the entire communist bloc, which grew 1% (not annually!) during the entire 1970s. There you have economies which are populated by state-owned and state-run firms heavily malinvesting during the 1950s and 1960s. (My source for this, by the way, is Frieden, Global Capitalism: Its Fall and Rise During the Twentieth Century. I can include page numbers if you'd like.) Why is this not evidence to balance your two examples?

Because you seem to confuse public ownership with "command economy". The two are not the same.

Boardman, Anthony E.; Vining, Aidan R. (1989) Ownership and Performance in Competitive Environments: A Comparison of the Performance of Private, Mixed, and State-Owned Enterprises:

The results provide evidence that after controlling for a wide variety of factors, large industrial MEs [mixed enterprises] and SOEs [state-owned enterprises] perform substantially worse than similar PCs [private corporations]. In terms of all profitability indicators, mixed enterprises perform no better and often worse than state-owned enterprises. In terms of sales per employee, MEs do better than SOEs, but in terms of sales per asset there is no substantial difference. These results indicate that there are performance differences between public and private companies in competitive environments.

Appears to be the first thorough empirical study in the literature.

I cannot fully access this study. What is their sample basis and at what corporations did they look at?

Cull, Robert; Xu, Lixin Colin (2002) Bureaucrats, State Banks, and the Efficiency of Credit Allocation: The Experience of Chinese State-Owned Enterprises

We describe features of the Chinese financial system that inhibited effective financial intermediation from 1980 to 1994 and investigate whether, despite these impediments, bank finance flowed to state-owned enterprises with higher subsequent productivity than did direct government transfers. We find that it did, at least in the 1980s, and conclude that bank employees assessed SOE credit risks substantially better than did the bureaucrats responsible for allocating direct transfers. Banks imposed harder budget constraints on SOEs than bureaucrats, but those constraints softened as the 1990s progressed. As a result, increased bank finance did not flow to relatively productive SOEs later in the period.

(That is, private funding is better at finding profit than publicly provided funding.)

Which says nothing about public enterprises and should be dismissed as such.

Morgan, W. Douglas (1977) Investor Owned vs. Publicly Owned Water Agencies: An Evaluation of the Property Rights Theory of the Firm

This paper has attempted to compare the cost structures of water agencies under two
alternative modes of ownership - public and investor owned. On the basis of the sample
used, investor owned water agencies appear to have lower cost structures. While the results
are interesting and confirm the property rights theory of the firm, several caveats
should be kept in mind. The sample is not randomly selected but limited to six states
where a large number of investor owned firms are located and fully report information in
the 1970 AWWA survey. The limited reporting of technical characteristics may mean that
variables are omitted because they were not collected and thus the total cost model is
misspecified. This suggests that further tests of this hypothesis should be done using
disaggregated cost data and additional independent variables, if available.

Obviously an incomplete study, but provides some support for the prevalent theory.

As I cannot access this study as well, I cannot really dispute or affirm it. However, I may just as well point out the obviously existing counterclaim of no private enterprise being able to match the success of Deutsche Bahn both domestically and internationally. The closest you would get with that would be Deutsche Post, which is a former public company as well.

In any case, even if one were to believe that every private company is suddenly more efficient than the public ones (a laughable claim considering the bankkruptcy rate of private companies) then it still does not follow that society is better off. For example, look at privatization gone wrong or resulting in little improvement (British rail) or consider that even if a private company would be better, it still might not do more for the common good.

I guess the basic question I am trying to ask here is whether you want basic services to be available only if they bring in a profit or do you think everybody should be guaranteed basic services due to the social contract.

Since the property rights theory of the firm is the theory I was taught in university, I would be surprised if it were not at least indicated by the empirical literature.

Well, then it should be relatively easy to pull open your textbook and give us the relevant empirical studies, no?

[Surlethe]

Argh, a long quote-by-quote. Next one, I'll try to cut back on the quotes. Stas, I'll try to get to your post later today.

No, it is not a wage cut, as the wage remains the same. The people paying it change, but the wage remains the same. And let us not kid ourselves, when you speak of wage cut you mean "worker receives less money".

"Worker receives less money from the employer." Workers work fewer hours at the same hourly rate, so their wages paid fall. Government steps in to replace lost wages. That is what you described, right?

On the one side you've got a "regulation is the enemy of business. Do not have the big bad state interfere in our jobs".
On the other side you've got "do what you want but we will doublecheck your every move and fine you harshly if you break the law". Which approach is likely to lead to more corporate excess?

Wait a moment, if I can't make a simple theoretical argument that state-owned firms are less efficient, why should you be able to make a simple theoretical argument that deregulation leads to corruption?

No, you don't get to pull this reversal of the burden of proof on me. You are a former mod here, you should know better.

That's not a reversal of the burden of proof because I'm not using this riposte to evade providing evidence, and since you implied the positive claim that being publicly owned is necessary for being able to plan in decades.

Deutsche Bahn was able to plan in terms of decades and as a result is a highly successful company which is the leading company in Europe (and the world's leading rail company). So please explain to me how they must automatically malinvest just because the owner happens to be the public. Public ownership btw does not mean "state interferes in every little detail", which seems to be the strawman you have erected in this thread, it merely means the public owns the firm and sets some broad ethical guidelines. Like "everybody should be able to afford his daily commute" and "we expect basic rail service to every part of the country". Outside of that Deutsche Bahn act just like every other company.

Where did I erect that strawman? And even setting broad ethical guidelines like "everybody should be able to afford the daily commute" can result in broad-scale malinvestment. For example, "everybody should be able to afford the daily commute" will decrease the cost of living for those people who should be moving to be closer to their work, and some of them won't. (Of course, now I'm begging the question: the most efficient configuration of society is that which is achieved by the operation of a free market )

Because you seem to confuse public ownership with "command economy". The two are not the same.

Of course they're not the same. A command economy is populated with entirely publicly owned firms, so it is an example of public ownership. Mind that I am not saying that any public ownership is going to result in the same results; I'm saying that the inefficiency compounded over the entire USSR economy should also be present in state-run corporations, to a much smaller extent.

Which says nothing about public enterprises and should be dismissed as such.

No, I disagree --- it says that to the extent which a public enterprise receives its funding from taxes, it is not subject to the same discipline. This contributes to malinvestment.

<summary requests>

When next I'm on campus, I'll get the papers and read them more thoroughly.

In any case, even if one were to believe that every private company is suddenly more efficient than the public ones (a laughable claim considering the bankkruptcy rate of private companies) then it still does not follow that society is better off. For example, look at privatization gone wrong or resulting in little improvement (British rail) or consider that even if a private company would be better, it still might not do more for the common good.

Not the claim I'm making --- that would be like saying, in the US all black people are felons. Instead, I'm making a statistical claim. On average, private companies in competitive markets are more efficient than public companies. (Although, Europe went through a wave of privatization these last 30 years, too, right? Current publicly owned companies are the ones who survived, so they're like to be more efficient than average.)

I guess the basic question I am trying to ask here is whether you want basic services to be available only if they bring in a profit or do you think everybody should be guaranteed basic services due to the social contract.

Should people have guaranteed access to basic food, necessary healthcare, basic childcare, and basic shelter? Yes (although it depends on what you mean by "basic"!) But at the same time, I wonder what the best way to organize society so everybody has that access is, and I'm not so sure that publicly organized enterprises is the best way of doing it. For universal healthcare, for example, I like Canada's model better than the UK's.

Well, then it should be relatively easy to pull open your textbook and give us the relevant empirical studies, no?

I'll go look those up then.

[Surlethe]

(I should add that while I think that the government needs to provide access to food, healthcare, childcare, and shelter, you don't often see me arguing for those because it's so much more fun to bring up opinions that disagree )

[Surlethe]

Stas:

Actually, quite a few economists doubt that the market reaches a general equilibrium. Some doubt that even a partial one is reached. It is natural, because the failings of marginalism are all too obvious to ignore. I mean, when you've got data samples, and then you've got a theory (e.g. wages adjust on the basis of labour marginal product producing an equilibrium) and then it does not happen, Uncle Critical Rationalism tell you the theory needs some serious re-thinking. General equilibrium (and most of the stuff based on rational expectations) is based on assumptions which themselves do not stand the test of practice. Bounded rationality was a great step forward for modern economic studies, and yet people seem to insist on clinging to old models.

I mean individual markets tend toward some equilibrium, not the entire economy. Who knows if there's a general equilibrium out there? I certainly don't. I do know that there's evidence for equilibria in individual markets, and evidence for equilibrium real growth rates, and so on. While we're on making assumptions, though, rational expectations are a slightly different matter --- I know that the assumption of rational expectations doesn't hold up to the test of practice, but it's still a remarkably useful theory, in that it explains (for example) the difference between short- and long-run Philips curves. Same with the efficient market hypothesis. Same with competitive free markets - another example, a free market model is capable of describing 90% of the wage distribution in US corporations. I think of these like Newtonian mechanics or continuum mechanics: useful approximations that we can use as long as we're aware of their limitations.

Considering the system is hierarchic, the buying power - always or almost always unequal, and the information asymmetry always (or almost always) present, it is hardly a good idea to call the market price of something being the "worth" of a thing, even if there's no better denominator. And, of course, lest we forget that small decisions accumulate. So you can't really even know what you lost while following the price as your guide.

Like you say, there's no better measurement. Since market prices are the best we got, we should use them.

The failure of equilibrium modelling seems to indicate that a better approach is needed. A disequilibrium one. But that absolutely terrifies economists, so I guess paradigm shifts will come only in time.

Just curious - are you current on the macro modelling literature? I mean, if two guys chatting on a discussion board can identify a research area for professional economists, it's likely that professional economists are pursuing it.

As a side note for this point (whatever Thanas may say), average private corporation lifetime (even that of a very large one) is around 25 years for the Dow leaders. Small fry lives much less. There are some tremendous examples of longetivity (Sumitomo), however, these corporations look much more like vast gigantic conglomerates with diverse investments and a "personnel first" priority, not like ultra-specialized megacorporations that live large only while their particular good or service is in high demand, and then decline and die.

Neat -- I didn't realize that turnover was so fast. (I would add this supports my point about "efficiency" through Schumpeterian turnover, although we've also just established I don't know what "efficiency" means.)

That's a remarkably harsh approach to humanity. Humans have inherent value or "Who shall not work, shall eat neither"?

You know, I haven't adequately settled this for myself (which may be another reason why I participate in these threads -- to air out different views and ideas). On better days, humans all have inherent value. On worse days, all value is entirely subjective and measured by definition in how much people are willing to pay. Usually I compromise and say that everybody gets basics, but isn't entitled to much beyond that. So any transfer beyond basics is not because people deserve it, it's to ameliorate poverty traps, encourage dynamism, and fix market failures.

Even if it were able to predict the future (which it can't), there are always events that alter the needs. Every event alters the need even while you don't know about it unfolding. You continue investing and then suddenly the bubble bursts. No one needs these capital investments, human settlements and even the humans themselves who were geared to become tools of extraction, humans who were brought there to work. Company towns are wiped out and the wind howls inside "sunk costs" - the price of trying to "anticipate" what people will want. Neither the market, nor any other system can predict the future.

If you aggregate like that, no. But some markets can predict some of the future, for example, look at how the inflation-adjusted treasuries market predicted low inflation in the US, or how currency markets have predicted various national defaults (often in the process bringing them about!), or how, in a bad harvest year, commodities markets will predict future supply shortfalls and reflect them in current prices. Markets to predict the future do exist, and can predict the future to some extent.

But since you point out that nothing can predict all of the future in great accuracy, I'd add that's why it's so important to leave the economy as uncoordinated, flexible, and dynamic as possible. It's basically a million experiments all happening at once, to see where the future is headed. To get there as successfully as possible, lots of experiments have to fail --- hence the ghost towns.

Unless, of course, we are talking about abusive techniques such as "demand formation" by brainwashing ads and political propaganda, to make people actually do what you want them to do (lest your investment becomes useless like a lot of it does). This is called a self-fulfilling prophecy, and one fulfilled by messing with human brains.

Hah, I don't really know that that's "abusive." (Another thing I haven't settled -- gets me in trouble with my wife a little bit, too, on the topic of women who choose to remain in fundamentalism.) Once people see the ads and want the product, well, they want it, and they're unhappy until they get it. It's not really any different than someone falling in love, right? The brain creates demand where none existed before.

Powerful people and influential people do have a lot of control.

Did Moses actually intend for all of what you described to happen? I'd be surprised if he did --- looks to me like those were all very unintended consequences, evidence of his lack of control.

[K. A. Pital]

I mean individual markets tend toward some equilibrium, not the entire economy

I'm not even sure that's the case. If individual markets tend towards an equilibrium, then the entire economy does as well. If they are disrupted constantly (which is a most likely case), I would presume that no equilibrium in one market also means all other markets are instantly disrupted due to the non-equilibrium price signals impacting the prices of all other goods in the economy.

I know that the assumption of rational expectations doesn't hold up to the test of practice, but it's still a remarkably useful theory, in that it explains (for example) the difference between short- and long-run Philips curves

Excuse me, but how is that useful if the Philips curve itself and associated concepts (e.g. NAIRU) are themselves based on rational expectations and therefore if the premise is falsified by experiment, the superstructure built on top of is is hardly useful. That's like saying "ether" is a remarkably useful concept because it helps us make equations based on ether theory. They're remarkably beautiful, those equations, but they also have little to do with the real world. Or take the math around the Higgs boson. It is beautiful, as a model on its own. However, if reality does not confirm the model, the consistency, beauty and non-contradictory character of the mathematical model mean little regarding its usefulness.

Like you say, there's no better measurement.

Sometimes it is better to admit there's a serious crisis in the scientific field and observe the competing theories instead of pledging allegiance to one of them. Might be the wrong one. The crisis of Newtonian dynamics spawned a great many alternatives, but only one theory could adequately explain experimental data.

Just curious - are you current on the macro modelling literature?

More or less. DSGE (the top-notch equilibrium modelling) is based on complete markets. That's... remarkably primitive.

Neat -- I didn't realize that turnover was so fast. (I would add this supports my point about "efficiency" through Schumpeterian turnover, although we've also just established I don't know what "efficiency" means.)

Efficiency (in macro) is usually derived from marginalist equilibrium theories - people imply Pareto efficiency when they say "efficiency". Suffice to say that Pareto efficiency says only that we fully utilize the productive potential, not how we utilize it.

I mean, if two guys chatting on a discussion board can identify a research area for professional economists, it's likely that professional economists are pursuing it.

I would agree with Steve Keen on the matter - neoclassical program is most likely degenerative research, heterodox schools have interesting bits here and there but none are strong enough to actually present a coherent new theory. Much less test it (as we know, testing heterodox theories in economics isn't that easy). There's ongoing research, but the entire field looks like a huge mess. There's a crisis in theory since many of the "orthodox" ones are simply failing the very basic scientific criteria (methodological falsificationism), and yet new theories haven't been able to adequately deal with it. In macro I'm personally reading a lot, from neoclassics and neokeynesians to world system analysis, and I can't say I'm satisfied.

You know, I haven't adequately settled this for myself (which may be another reason why I participate in these threads -- to air out different views and ideas). On better days, humans all have inherent value. On worse days, all value is entirely subjective and measured by definition in how much people are willing to pay.

Even on my worst days I don't really subscribe to a social-darwinist approach with "entirely subjective values".

Markets to predict the future do exist, and can predict the future to some extent.

Some stuff you cited is a prime example of self-fulfilling prophecies, and technically I wouldn't disagree that when you speculate a lot, some of the speculation will be correct.

But since you point out that nothing can predict all of the future in great accuracy, I'd add that's why it's so important to leave the economy as uncoordinated, flexible, and dynamic as possible.

I'd say flexibility is not a matter of coordination. There are multicellular organisms which are pretty... flexible, shall we say, and then there are bacterial colonies where natural selection ensures the immortality of the colony while individual bacteria die during the selection process. The advantage of a multicellular organism is the ability to perform more complex tasks than just "grow and consume", and eventually have a mind. *laughs*

Hah, I don't really know that that's "abusive."

It is. As a person who had his experience with fundamentalism, it is quite abusive. Human psyche is easily corrupted to take the fact (or what is being said) as the norm. Witness the Milgram experiment and the Stockholm syndrome. I mean, what else would one need to prove that it is extremely easy to make people (1) do as you say (2) consider what happens de-facto as a norm, not an atrocity, excess, abuse or the like.

Did Moses actually intend for all of what you described to happen? I'd be surprised if he did

I meant to point out that when a powerful person makes a decision, it is carried out (consequences aside - both the predicted ones and the unpredicted ones as well). Powerful people have more influence in decision making. That's the paradox of capitalist logic and hierarchical logic in general. Once you have one person having more decision rights over an issue than dozens or even millions of people, that creates tremendous potential for abuse. Not that I'm entirely against technocracy, but the selection process that the darwininan societies of today run for the candidates who administrate flows of capital, governments local and national and so on... seems to bring "efficient psychopaths" into positions of power. Not deeply empathic and caring technocrats, but ruthless biomachines perfected and shaped by their environment into "sharks" without a shred of empathy and 100% fixation on whatever's the new task at hand.

[Surlethe]

I think I'll get to this tomorrow or Thursday while I'm on campus, and can access the studies I cited.