The Spectrum of how to organise a Nation’s Economy - Part 2 of 4

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More implications of the Different Levels of State Spending

Communism
When the level of State Spending gets to very high proportions of a Nation’s GDP, there can initially be some benefits and in fact, back in the early 1920s when Communism in the USSR got started, the Economic Figures coming out were far superior to other Countries for a period of time (of course, that is assuming that the Figures were correct - it was very much a huge part of the Propaganda of the Commies to exaggerate how successful they were when in fact that was far from the truth). This initial boost comes because State organisation of various Industries (in the USSR they grouped Production into particular geographical regions - for example Shoe making would be done in one particular Town or whatever and Kitchen Utensils would be made in another Town) and the simple fact of concentrating production in this way was highly efficient for a while, through efficiencies from factors like labour specialism (Division of Labour), centralised purchasing and ease of logistics, etc.

Another example is provided by both the US and the UK during World War 2 when the States in both countries concentrated and focused War Production of stuff like Airplanes, Munitions and Tanks etc. but again it resulted in highly efficient production for a while but it was pushing the Workers extremely hard and it is unlikely that these kinds of production levels could have continued for long. In fact, I suspect it was only possible because The Allies were clearly winning the War by this point and that kept the Workers motivated but had the tide turned and the Nazis and Japanese regained the upper hand, I suspect that production could easily have tailed off. The Nazis achieved high production levels by the brutality of their Slave Labour regime, although many weapons were sabotaged by the Prisoners.

It is notable that during the War Years in the UK the Railway System was starved of Funds at the same time that it was being worked at an extremely high level - needless to say this lack of Investment meant that by the End of the War the Railway Network was in a complete mess and this could have contributed to the cuts to Lines etc. that were required in subsequent Years. We may have won the War but the damage to the UK’s Economy and Infrastructure was considerable. Many people argue that the success of Germany and Japan after the War came from their need to invest in modern and efficient Machinery etc. and this was assisted by considerable Aid and Investment programmes from the Victorious Countries.

For the USSR, the catch is that over time the lack of competition which is a given in a more Free Market arrangement meant that Products did not evolve and in reality there was no incentive for anyone to improve the goods that were created. This is exactly why the Russians were driving Ladas in the 1980s and 1990s when we were in relatively flash Motors like BMWs and Audis etc. (in fact, the Ladas weren’t even a Russian design - they were based on 1960s/70s Fiats). It can be argued that this lack of innovation was a major reason for the collapse of the USSR as the people became more and more dissatisfied with their meagre existence and crazy things like having to queue for hours to buy a loaf of Bread (Corbyn supporters take note !!).

This could also be witnessed in the Space Programmes of the 1950s/60s/70s etc. by the USA and the USSR. I always remember seeing a Russian Command Module which was for 2 Cosmonauts or something at the Science Museum in London and what stood out was how inside it was all pipes and plumbing. In a US Capsule, it was all wires and electronics !!

It is arguable that there is no Country that has ever made a success of Communism - some would say Cuba but in fact that has been massively supported by Russia and is increasingly becoming more Free Market and somewhere like North Korea only survives because it brutally oppresses its People (such totalitarianism is a feature of pretty much all Communist Regimes) and China is very supportive as they want it as a ‘Buffer State’ against The West. Vietnam has a Communist Government I think but again this is really Communism with a huge dose of Free Market trading - rather like China which is also a mix (and of course China itself moved away from Communism despite still being run by ‘The Communist Party‘). Look at Venezuela and Greece for yet more examples of Left Wing failures.

Who wants a Trabbie or an FSO Polonez when you can have a Golf Gti?

Fully Free Market
As I mentioned earlier in Part 1, when you have a totally Free Market where the State spends nothing (ok, it is entirely theoretical), you end up with anarchy and total chaos. There is no way that such a State could function as crime would be off the scale and no one would be safe and there would be no big incentive to have education and suchlike and no doubt life would be extremely cheap. It would also mean no ’Property Rights’ and there would be little point in investing Money into a Business or other Enterprise because unscrupulous Criminal elements would steal your Money, Profits, Buildings etc. 

I guess to an extent we get such a mess in many extremely poor African States and in places like Somalia where Warlords in essence perform the role of the State and do it very badly. Governments can be very bad in so many ways but you need a basic level of State ‘bullying’ to ensure a level of safety for Citizens and to provide Defence of the Country’s Borders and suchlike.

By definition really a Fully Free Market system is the polar opposite of a truly Communist system and a key part of the continuing improvements that such a system provides is that given by ‘The Profit Motive’. The essence of this is that everyone within the Economy is driven to make Profit (even a ‘Worker’ is someone who swaps their Labour for payment in the form of Money or Goods and they are looking to maximise their Wages and in effect drive up their ‘Profits’ with Pay Rises etc.). 

The famous 18th Century Economist Adam Smith’s essence in his tome ’The Wealth of Nations’ is that all Business Owners are trying to maximise their Profits and by the simple means of them doing this the whole Society benefits - and I totally agree with this although there is the concept of ‘Satisfice’ where many People achieve a certain level of ‘Profits’ and they are happy with the lifestyle this gives them and they do not push themselves too hard to gain more. I know this concept well because I am very sure I satisfice in my own Lifestyle where I trade off more Wealth for an easy and stress-free Life with the proviso that I am comfortable in terms of my finances and I can do the things in life that I want to do. This idea of Satisfice is clearly where some of the Free Market principles are not entirely accurate.

A related and important idea is that of ‘Creative Destruction’ as per the Austrian Economist Joseph Schumpeter. This is to do with efficient allocation of Resources within an Economy and the idea is that when bad Business Models and inefficient Businesses fail, the Resources that were being used (for example Factories, Buildings, Machines, Staff, Money etc.) get redeployed to better Businesses and this over time means that the overall Efficiency and Productivity of the Economy gets better and better. 

This is similar to the idea that when we Sell a Share from our Portfolio it is often because we think that the Growth and/or the Income from that Share has run out of puff and we want to redeploy the Money (the Capital) into another Share that we think will do better.

There is an argument that one of the reasons for poor Productivity in the Western World since the Credit Crunch in 2008/9 is that extremely low Interest Rates and a general stance of forgiveness and forbearance by Banks and Governments has meant that many bad Businesses have stayed trading and this means that the powerful forces or Creative Destruction have been unable to re-allocate Resources more effectively. 

This works in another way as well - all these ‘Zombie’ Businesses mean that good Businesses are facing what is in effect unfair competition and this prevents them investing as well, so the whole Economy loses out. Of course there are other contributors to the low growth such as a massive Debt overhang in both the Public and Private Sectors and cheap labour from high levels of immigration reducing the incentive for Companies to invest in modern and more efficient Machinery (Capital Goods). This latter concept often comes up where Labour and Machinery are in competition with one another and it is when Labour Costs are high that Businesses will invest in more efficient Machinery so this boosts Productivity and this again might help explain the ‘Productivity Puzzle’ that has dogged Europe and the UK for at least a decade. 

Another possible factor around this is that Unemployment Figures are hugely manipulated across all Western Economies and most have huge pools of Labour that do not get officially counted as Unemployed because they are not claiming Benefits but in reality they are still part of the Labour Force and will take Jobs when a suitable one comes up. This again keeps Labour Rates down and I would suggest that the Minimum Wage has also had a dampening affect as whenever anyone goes for a Job at the lower end, the answer to the question “How much are you paying?” is always “Oh, it’s the Minimum Wage” and this means that there is little variation in Pay Rates at the bottom end unlike we saw perhaps 20 Years ago or so. When I first started working at Bejam Frozen Foods 35 Years ago, every Supermarket was paying a different amount and the top pay was at Marks & Spencer so the kids were trying to get jobs there. Now you find that all Supermarkets just pay Minimum Wage.

Here is a Link to the Wikipedia entry for Joseph Schumpeter and Creative Destruction:

https://en.wikipedia.org/wiki/Creative_destruction

I would argue that Communism and Free Markets are not actually opposite things that you can choose and are therefore not a Political Choice. I totally follow the idea of Adam Smith’s ‘Invisible Hand of the Market’ and that in Countries where a Communist or Socialist system is ‘chosen’, the reality is that the Free Market and the Invisible Hand have not gone away and these forces are continually undermining the imposed and unnatural system and this is manifested by the usually buoyant and dynamic ‘Black Market’ where the Profit Motive is clearly in evidence (and the brutal Police and Secret Services in these Countries is all part of enforcing this unnatural system). Look at the North Korean system where Black Market Shops are easily visible and regularly used by the population and I have seen some funny News Reports from Pyongyang where the Reporters interview members of the public who have just been to a Black Market shop and they are quickly ushered away by their obligatory Minders !!

In line with this the proclamations such as “Down with Capitalism” and the ‘Anti-Capitalist’ Marches and Riots and suchlike from the nutty left are quite silly. As I have mentioned above, it is more the reality that Capitalism is the natural order of things and it is an entirely false choice to make out you can have Socialism/Communism or Capitalism. Capitalism is like the air that we breathe or the water that a Fish sploshes about in. If a Fish chose not to have water it wouldn’t be long before the flaws in this idea are evident.

Of course a Free Market system is not perfect by any means and it can be very wasteful with Resources often allocated to inefficient and unproductive parts of the Economy for sustained periods until the bad Business Models finally fail. This has the added problem that any Machinery etc. will most likely be out of date and inefficient so it is wasted and can only go as scrap at best (but even as scrap it can be re-used).

However, the argument here is around which kind of system has the most inefficient use of scarce Resources - I think the evidence of Communist Systems failing to endure all over the Globe throughout history shows that the Free Market system is the superior one (even if it is far from ideal). I think it was Winny Churchill who said something like, “Free Markets are the worst way of organising an Economy apart from all the others”.

Mixed Economy
The drawbacks of a Communistic approach can also rear their head in a Mixed Economy - these are the problems of Monopoly Power and the ‘Free Rider Problem’. You can also get challenges such as those that come along with the idea of ‘Public Goods’.

I won’t go into it in detail (you can look up ‘Monopolies’ on Wikipedia) but in essence the drawback of Monopolies tends to be higher Prices for Consumers along with reduced choice of Products and Services available. Monopolies also tend to have highly unionised and militant Workforces because the nature of the ‘Essential Service’ that they often provide (e.g. provision of Water and Sewage disposal) mean that they can hold Governments to ransom to force their demands for higher wages and less working hours etc. You only have to look at Train Drivers on the London Underground getting paid huge salaries to see evidence of Monopoly Power being abused by Trade Unions.

Monopolies often arise as a result of good intentions by a Government but the Regulatory Regime they create entrenches the Providers of a Good and/or Service as they crowd out Competitors and create Barriers to Entry which new Companies are unable to compete with in a profitable manner. For example, the way Water Companies are regulated with huge ‘Economies of Scale’ being needed to both finance them and to ensure sufficient Profit can be made, means that it is pretty much impossible for a New Entrant to get involved in that Market and this is borne out by the simple fact that I cannot remember any New Entrants coming into the UK Water Market since the initial flourish of acquisitions just after the initial Privatisations. There are massive Regulatory Hurdles from things like the Environmental and Investment requirements that only a huge existing Business could possibly attempt to compete with - and as we see very few Water Company mergers etc. happening, we can be pretty sure that the existing Providers are in a very secure and moaty position. 

Governments may have good intentions when they create more and more Regulation but in reality it does significant damage to an Economy’s competitiveness and ultimately it will lead to lower Living Standards as we are seeing all across Western Nations as years of Over-Regulation and high State Spending have sucked dynamism out of their Economies and this has also come at a time of Globalisation shipping Jobs overseas and Demographic Change meaning falling Birth Rates and aging Populations. No wonder then that we have a rise of ‘Populism’ as shown by Trump, Brexit, Far Right Governments in Eastern Europe and Italy, and the Yellow Vests in France.

Another way in which Monopolies can arise is when a Big Player with deep pockets buys up a huge number of Businesses within a particular Industry and therefore gains Monopoly Power. For example, back in the early 20th Century, there were huge Corporate Battles between the large US Steelmakers (the Carnegies and Vanderbilts etc.) which resulted in Monopolies being created which could control both the Volume of Steel created and the Price that buyers were forced to pay. This was of course a big problem for the US Industrial complex and in the end the US Government was forced to break-up these Monopolies. These days governments have ‘Mergers and Competition’ Authorities who investigate particular Sectors and this is especially the case when Big Players propose to combine to create a much larger Business which would take perhaps more than 25% Market Share.

A similar situation arises when you have an Oligopoly - this is where you get something like 5 big players which are of similar size and they tend to act in a very similar way because they all realise that a ‘Price War’ would be in the interest of none of them - but it would in fact help the Consumers. A good example of this was when we used to have ‘The Big Four’ Banks and it has only really been since the 2008 Crisis that the Rules have been changed to enable smaller Banking operations to be set up and this has been starting to nibble at the Market Power the Big Banks have although they are still in a very strong position as customers have considerable inertia when it comes to Bank Accounts (I have not changed mine for nearly 30 years !!). 

Another example is that of Petrol Stations back in the 1970s and 80s where you had just a handful of Providers such as Shell, Esso, BP, Texaco etc. and it was no coincidence that the Price per Gallon of juice was pretty similar across all of them. It was only later when Supermarkets started to muscle in and provide Petrol Forecourts that this Oligopoly was weakened (note my choice of words there, it is still quite likely that the Fuel providers work in a manner which is not really giving the biggest advantage to customers). Again you can find out more about this on Wikipedia no doubt, but the simple fact is that Oligopolies are bad for an Economy.

Before ending this bit, I want to just make a quick distinction. I see ‘Socialism’ as just a mild form of ‘Communism’ which is more the full-fat State control of an Economy. Socialism is a softer form with a bit of freedom left for Individuals (but not much !!). From a quick look at some definitions on the Interweb, they seem to see Socialism as a step on the road to full on Communism. Whatever, they are both pretty silly as far as I am concerned !!

Some other interesting Economic Concepts
Needless to say there are loads of Economic Theories and Ideas and here are a few that are worth looking at:

Public Goods
These are ‘Goods’ that everyone in a Society can use (or in other words take advantage of) without them being depleted or used up by one individual, so they remain available for everyone. The best example is the provision of Defence where everyone in the Society benefits from it and one Person’s use does not deplete it. In reality there are very few truly ‘Public’ Goods and examples could be Sewer systems, Public Parks, etc. The definition I have put a link in to below says that Public Goods are always financed by the State although I am not convinced that this is entirely true.

Here is the Investopedia link:

https://www.investopedia.com/terms/p/public-good.asp

The Free Rider Problem
This is where many Users of a Public Good don’t pay for it yet they take advantage of it. The upshot of this is that the Public Good can end up not being available because those that do pay money for it get resentful and they stop paying so nobody gets the benefit. This also results in an inefficient allocation of resources across the Economy. An example might be a beach where a few People own it and end up having to pay to keep it clean and tidy and make sure there is sand on it and stuff, but other people are ‘Free Riders’ and they turn up and make a mess and kick the sand about and then just clear off and have not paid a penny. After a while the Beach owners get fed up and they stop cleaning it etc. and put up a Fence to stop other people taking advantage. Another example might be the Loo in McDonalds !!

Another example is Defence of the Nation being provided to everyone who lives within that Country but Non-Taxpayers benefit from it and the great paradox is that shifty Individuals like Corbyn also benefit whilst doing everything they can to undermine it !!

Here is Wikipedia on the subject:

https://en.wikipedia.org/wiki/Free-rider_problem

The Tragedy of the Commons
With this one, the easiest way to think about it is where you have something that is in effect a shared thing where nobody pays any money for it but everybody uses it with the sorry end result that the thing itself is in effect destroyed.

Think of a sweet little English Village in medieval times where they have a chunk of grass in the middle called ‘The Common’ and everyone puts their Sheeps and Goats and Pigs and Chickens and Cows and Spiny Anteaters on it. It is pretty obvious that if there is no control on how many Animals are allowed to feed on the grass and trample all over it and poo on it, before pretty long the grass will all be munched and crushed and worse and it is now of no use to anyone and the Animals will all starve. So this is a great example where some sort of Regulation is useful and important. 

Here is the Wikipedia entry:

https://en.wikipedia.org/wiki/Tragedy_of_the_commons

That’s it for Part 2. In Part 3 I look at Levels of State Spending within a selection of Major Economies and you will be treated to some pictures and stuff.

Cheers, WD.