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Welcome to the Oligarchs Project

Promo Photo2I am a UNSW academic and author of the best selling Cambridge University Press book ‘How to Argue with an Economist: Re-opening political debate in Australia”.

I am doing a research project into the power of big business in Australian politics. The project has been crystallising my thoughts about what a post-neoliberal economics might look like. I will be using this blog to share my findings and thoughts as they unfold.

Profit Bludging and the Long Chain Economy

To attack economic inequality at its source we really need to take on what I like to call ‘profit bludging’.

There are some businesses out there that have a great idea, and find a way to turn cheap resources into a product people really value. These are the wealth creators in our society. They make a healthy profit, and so they should. They have made a contribution to our collective well-being.

But then there is our anti-hero. The profit bludgers.  These are the businesses that boost their profits in ways that don’t add to our wealth at all. They are not making the pie bigger, they are just taking a larger share of the pie.

Examples of profit bludging would be when Coles & Woolies boost their profits by cutting what they pay to farmers for their produce.  If they are paying a lower price for the same thing there is no actual efficiency gain in it. It is just a straight wealth transfer.

The same could be said when big retailers turn their permanent staff to casuals. They boost their profits by cutting what they pay their workers. Instead of having to pay the same wage bill whether it is busy or quiet, they can shift that risk onto their workers. Its low paid workers whose incomes fluctuate.

If the  workers have something excellent they could be doing with their time in their now unpaid hours their might be a gain in it. But most of the time we know that is not the case, it is just harder to pay the bills some weeks.

I would put businesses that manage to gouge their consumers without delivering any value in this camp too.  That is the businesses that get you to sign up for a subscription, and then make all their money off people forgetting cancel. Or Telstra offering 18 different phone plans to overwhelm consumers with choice, but setting the default as the most expensive one.

This is businesses extracting profits without creating any wealth. They are just shuffling money from our pockets to theirs.

Profit bludging is usually achieved through power and manipulation. When the supermarkets dud the farmers they achieve it by flexing their muscle over people less powerful. When Myers downgrade their workers, again it is an exercise in power.

For Telstra it is also about exploiting people’s vulnerabilities.  They know that people’s capacity to cope with complexity is limited. They are using that to trick people into paying for things they don’t want.

In the language of the long chain economy, they are shifting profits along the chain. They are not creating wealth. They are just using power and manipulation to redistribute it.

A new economics needs to distinguish between this good and bad profit making behaviour. We need to distinguish between behaviour that builds efficient chains, and behaviour that just shifts wealth along it.

But mostly, we just need to shame people for being basterds.

Free markets or long chains? The real driver of wealth

We often describe ourselves as a free market economy, but is the free market really what is driving our wealth? Or are markets just a small part of the picture, obscuring the much bigger driver of our prosperity.

Adam Smith argued that at the heart of economic development was gains from specialisation. The idea was that when we were self sufficient, growing our own food, building our own homes and sewing our own clothes, we were ‘jack of all trades’ but master of none. We performed all of these tasks at a very low level.

The process of economic development he argued was driven by a process of specialisation and trade.  Specialising in a single task enabled us to become much more efficient at it. We developed high level skills and better tools. This boosted productivity enabled us to produce more. People could then take their surplus and trade it for other goods they needed.

This process of specialisation began with the shift from self-sufficiency into small villages. It continued as the early factories organised people to complete even more specialised tasks in long production chains.  These days our production chains stretch around the globe. There are literally thousands of people who have had a role in producing the pen you write with.

So where do markets fit into this picture? They occur between some of the links of the chain. There are sections of chain where all the links occur within a business. Then markets occur linking one business to another. In our longest production chains there are many businesses combining together to produce the ultimate product.

In this approach markets are not the sources of wealth and efficiency. That has come from specialisation. But they do perform a very important role in connecting up the chains and co-ordinating the links. The way they do this is ingenious.

Benefits of the Pursuit of Profit

The question of how co-ordinate the links in the chain to produce the goods society wants   is one of the most complex we could possibly imagine. Fortunately, the pursuit of profit provides a stunning solution.

You make a profit by selling something for a higher price than it cost to make it.  If you are an entrepreneur in search of a profit you will seek out the opportunities where a product is highly valued and people are prepared to pay a high price for it, but where costs are low and the product doesn’t cost much to make.

If entrepreneurs were able to operate in a fully rational and full informed way, their profit seeking would systematically link up the chains in the most efficient way possible. They would start where the gap between price and cost was greatest. As the most profitable options were taken up it would target the next most profitable connection, then the next and the next. They would always pull up before price paid was less than the cost.

The market of course does not always live up to that ideal. Arguably, instead of perfect information and rationality, what we have is thousands of people trying things out through trial and error. Those that find the most profitable connections make a motza, and the majority fail.  As a society, however, we collectively benefit from this process of trial and error, as once successful connections are made they tend to endure and provide considerable efficiency gains and wealth to the society.

In all, as a de-centralized social co-ordination mechanism, it’s genius. But it is not without its faults.

Downsides of the Pursuit of Profit

The pursuit of profit does have some serious downsides.

The first issue is that there are two ways you can make a profit. One approach to profit seeking is to find a brilliant way to connect  up links in the chain so that you can find a low cost way to deliver something that is highly valued and people will pay a high price for. When entrepreneurs do this their profits reflect that they have added wealth to the community.

However, the other approach to making a profit it to redistribute wealth along the chain. In this case business people try to concentrate the wealth of the chain into their link. The wealth of long chains is created by the co-ordination of a large number of specialized links. It is the combination of the small parts into the whole that creates new wealth. What is each links’ share of the wealth is indeterminant and up for negotiation. By trying to push down the prices you pay to your suppliers, or by cranking up the price you charge to your customers business people can boost their own bottomline.

The first approach to pursuing a profit co-ordinates our chains and brings wealth to our societies. The second approach is exploitative and drives inequality.

This means that one of the great challenges of the long chain society is about how to create just chains, where the wealth is spread fairly along the chain.  

I have a few thoughts about how this can practically be done in terms of current policy debates. More on that next time.

 

Govt pays 6 times the price for PBS drugs – is dark money the reason?

Govt pays 6 times the price for PBS drugs – is dark money the reason?

In the wake of the Dark Money report, Martin Whitely, a former Labor MP and Executive Director of the Health Consumers Council, got in touch to explore whether political donations could be behind an extraordinary anomaly in our health system.

Martin pointed to a Grattan Institute report which found that the Pharmaceutical Benefits Scheme (the program that purchases our drugs and provides them to us at subsidised prices) is paying up to six times as much for the drugs as the Kiwi govt across the ditch. They also pay more than many other state government bodies who also bulk buy drugs.

In the wake of all the noise we have heard about ballooning health costs, it is extraordinary that one of the most expensive items in the federal budget is being allowed to balloon out like this. If we are facing a health funding crisis, why are we cutting nurses rather than cutting the fat we are paying the big pharmaceutical corporates?

Is dark money to blame? Don’t know yet – but it certainly a fascinating issue that we will be looking into.

 

Donate $20 million with no disclosure – pay on different days

Hi All,

In the Dark Money report I argue disclosure is entirely optional because payments as large as $20million can be concealed through donation splitting. Ie breaking large amounts into small payments that individually come in  below the disclosure threshold.

This claim is often made about payments of $100,000. This based on making payments to separate branches. However the reality is worse. Payments made on separate days do not have to be aggregated. So you can pay $10,000 a day, 5 days a week, 50 weeks a year to eight branches and pay $20m without having to disclose.

My evidence that this is permissable is from AEC guidelines to political parties on how to complete their returns

. http://www.aec.gov.au/parties_and_representatives/financial_disclosure/guides/political-parties/information.htm#part2

Check it out for yourself! They even give an example.

 

 

 

 

The Chain Economy

The Chain Economy

The image that springs to mind when we think of the ‘economy’ is perhaps the most powerful idea in the modern age.

If you are an economically trained policy maker, the image will be a graph of demand and supply.  It is a graph with two lines intersecting, reflecting a natural tendency towards equilibrium.  It tells the story of a self correcting mechanism that self directs towards the best of all possible worlds.

It is interesting that this is the dominant imaginary of the economy, because it doesn’t provide us with a way of thinking about either of the most important economic questions – how do we achieve growth and what is the impact on equality.

The model of demand and supply tells us nothing about growth. It is what is described as ‘allocative statics’, that is assuming technology, labor and  capital are all constant how do we allocate what we have right now in the best way possible. It doesn’t tell us anything about how economic development and growth occur.

It also doesn’t tell us anything about equality. The demand and supply curve aggregate individual choices in a way that assumes we are all the same, and which makes it impossible to separate different social groups.

To address either of these major economic questions, we have to move away from our dominant imaginary of the economy and develop entirely separate models and tools that have nothing to do with our central image.

Recently I was asked to give a first year lecture on the global economy and introduce students to ideas of economic growth, inequality, the political struggles over economic models and the impacts of globalisation. It was an immense brief and not one that you could give using the usual models.

I looked for a unifying image of the economy that I could set up and hang all of these issues on.  The image that I settled upon was the production chain.

I explained Adam Smith’s original ideas about economic growth springing from the gains of specialisation.  I explained how being a jack of all trades that made our own houses, sewed our own clothes and grew our own food made for a pretty poor standard of living.

However, by specializing we were able to develop skills and tools that made us much more efficient at a much narrower task. We could then use our surplus produce to trade with others who were also specialized, increasing our combined total wealth.

I explained how the process of economic development was a process of specialization and  lengthening production chains. It began with cottage industries, grew into the early factories, and today is made up of global value chains that employ thousands and reach around the globe.

Using this image we were able to talk about equality as the distribution of wealth along the chains. Wealth was created by this process of specialisation, but it has been hotly contested where that wealth should manifest along the chain. We could talk about Marxism, unions, and the long political struggles about how the wealth should be distributed.

We could talk about the growth of the welfare state and the century long political struggles that saw the chains regulated to create minimum wages, OH&S and environmental sustainability.

We were also able to talk about globalization, and how as the chains began to cross international borders, democratic governments lost the ability to dictate the rules on the chains. How the victories achieved began to be eroded as governments competed to keep as much production in their own countries as possible.

 

Thinking about the economy in terms of chains not only offers a way of connecting up how we think about the major policy challenges facing us, it also invites us to think about a whole range of new questions.

More on that next time.