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Too much or too little government?
Some general thoughts on the dynamic tension between government and business, on the dangers of their confusing their roles, and on the problems caused by the current trend to polarisation in politics
August 30, 2018
First of all, I subscribe to an ethos of plenty. I do not believe there is a finite pie that must be divided and that we should fight to make sure we get as big a piece for ourselves as we need to satisfy us in a zero-sum game. I do not believe in a Malthusian view of resources or that the earth can only support so many people per acre of arable land.
Instead I believe that human history has demonstrated that we can think outside the box and through technology and science we can find ways to create more goods than the world needs and in a sustainable way. We must however acknowledge our challenges and work to respond to them: we cannot assume that nature and market forces alone will keep us in sustainable plenty and ward off environmental collapse.
With that said, I now move to the subject of this essay, which starts from the premise of there being essentially two ethoses: government and business. (This premise borrowed from Jane Jacobs in her remarkable Systems of Survival).
Government is territorial in its key responsibilities. It fulfills a role comparable to that of a feudal lord providing perimeter protection, keeping the peace, adjudicating disputes, and keeping the land which feeds the people protected and safe for present and future generations. The feudal lord would have collected few duties for this, but today the people fund government through taxes. They consent to this government in different ways: by voting, or in a dictatorship by not overthrowing the dictator. Different territories (or peoples who migrated to or from them) have developed different belief systems as a result of their specific geographies, climate and history, and they think of their method as natural. If you are brought up in a place where individual freedom is entrenched as a cultural value because it was critical to the territorial community’s success at some point in history, you will think that is natural. If you are brought up in a territory where people believe they are their brother’s keeper, because success has come through cooperation rather than independence (perhaps owing to climate or geography), you will think that is natural. Each territory will have trouble understanding the views of the other. As Margaret Mead put it, “We like what we eat, we don’t eat what we like”—children in India like spicy food and English children don’t, their taste buds are no different.
Given its territorial nature, government thinks in terms of borders: expansion of borders for one country means reduction of borders for another; land is finite, and I can only have more at another’s expense, and vice versa. With respect to government then, an ethos of ‘plenty’ as I described above- which involves growing the pie- is not exactly possible. One cannot grow the earth’s surface (yet, to my knowledge). A custodial or guardianship ethos is necessarily zero sum. Think of the Arctic sovereignty disputes currently. The government tends to think in terms of win-lose with respect to treaties with other governments, unless it is negotiating trade agreements on behalf of its businesses, where the business concept of expansion for all without corresponding contraction enters into the conversation.
Business is commercial. Rather than a property-based ethic, there is the idea that by trading we can increase productivity. If you have something I need, and I have something you need, we can both be richer if we trade. Resources may appear finite, but unlike the earth’s surface, the availability of goods can be stretched out. We have never run out of anything, because we find another way to meet our needs for the main use of the resource before complete depletion and thus always have some left for the things we still want it for. For example, if we just keep using oil the way we have been eventually we will run out of it or at least run out of the economically viable available oil. Because we are switching to other energy sources, we will likely always have enough oil for plastics, and if not, we will find another way to do that too. Basically, since Adam Smith wrote The Wealth of Nations, the rise of free market economies has led to huge increases in wealth, and the more global this has been the better. Every decade a bigger percentage of the world’s population is lifted out of poverty: wealth is not a finite pie, it is something that grows through increasing productivity. (The key takeaway here is that capitalism and trade have overall been positive compared to systems that preceded them, such as feudalism.)
Trade makes this happen. If you are good at making shoes and I am good at farming, we can both do both, which means I will eat well and have poor shoes and you will not eat well and have good shoes, or we can trade, which means we both will have good shoes and lots of food. Even if I have to give you all your food to get one pair of shoes (a trade deficit), I will still be better off than if I took time I could be growing food and used it to make shoes that didn’t fit and didn’t last and took forever to make. It’s best for me to do what I am productive at and you to do what you are productive at to maximize overall productivity. In the US-China case, for example, by China manufacturing electronic things and clothing really well, they are much cheaper, and Americans can have more goods for less money than if they made them themselves. People who work in McDonald’s in America can now own 40” TVs: in many ways they are wealthier than the people who worked in manufacturing in the 50’s. China benefits by employing its people lifting them from subsistence farming or even abject poverty.
Trade is a win-win, subject of course to negotiation. America is richer because China makes its stuff than if it made it itself. However, just because this is true, there is no guarantee that this wealth will benefit everyone: Americans could work many fewer hours for the same standard of living if all of the wealth had not concentrated in the hands of a very few at the top.
Interaction of Government and Business
This brings me to how government and business interact: government’s job is sustainability, and not wealth creation. Sustainability means ensuring we do not inadvertently deplete the environment in irreparable ways and that there is social cohesion and stability to allow business to innovate and create wealth. In the absence of social cohesion, valuable resources have to be spent on policing, prisons, gated communities and other things to ensure safety so that business can operate. This is unproductive overhead and requires more tax burden, either through government or in having to pay for the private provision of these services. In the absence of social cohesion, there will be economic volatility which will make it difficult for business to plan, and for individuals to feel secure and therefore to buy the goods and services that business offers causing it to employ people. Social unrest as expressed in crime and protest are a drag on wealth creation.
In an imaginary world without government, free markets (which have never existed anywhere in reality) would result in the rich getting richer and the poor getting poorer. This would lead to the poor seeking ways to redistribute income through crime or revolution, giving rise to greater needs for enforcement. Piracy on the high seas was a good example of this. When British ships plying the coast of Britain with goods for trade were attacked, their owners armed them. They eventually developed a fleet of ships just to protect the trading vessels. As good business people, they realized this was distracting them from their core competency: they were losing productivity as traders because they also had to be policemen. They went to the King and offered to pay him taxes if he would run the protection fleet, which, as a government, was more in line with HIS core competency of territorial protection. That is the origin of the Royal Navy, which it can be argued is responsible for much of the shape of the modern world.
We have evolved far from this at this point, but the roles are the same: business creates more and more wealth by increasing productivity through specialization, which is facilitated by the exchange of goods and services where the free market rewards those who devote their energies to their core competency: the shoemaker makes shoes (and becomes better and better at it, until he is Thomas Bata), the farmer farms, or the educated economy innovates and makes robots, software, movies, designs, music, and inventions, and the low wage economy develops manufacturing efficiency. The freer the market the more this can happen, the more goods and services are produced internationally per person hour and the bigger the pie gets, the more there is to go around. Initially the free market creates job opportunities in places where there were few, and actually distributes wealth effectively. However, as time goes by, with the magic of compound interest and inheritances and cumulative wealth management knowhow, wealth begins to concentrate in the hands of a smaller and smaller group of people. These people are increasingly skilled stewards of the wealth and expand it more and more, which is a positive outcome. In fact, to the extent that they deploy the wealth in the economy it further increases productivity and the amount to go around. While much is made about the concentration of wealth in a tiny group, they amount they consume is not a real factor: most of their wealth is at work meeting the needs of society and creating opportunity. Nevertheless, this concentration gives them great power and works against innovation and adaptation, making society resistant to needed change: large holdings in fossil fuel companies for example can influence which politicians will be supported, how news outlets report issues like climate change, and even what research is given credibility. The holders of such wealth have a vested interest in slowing change, as the faster change occurs, the more difficulty they will have in profitably divesting their holdings. In its guardianship role, government must perceive this risk to the sustainability of the system and take steps to offset it.
Further, in the absence of equitable redistribution, inequality increases and leads to social unrest, exacerbated by the influence the wealth holders begin to have over government beyond their number regardless of the government system. It is government’s role to avoid social unrest by ensuring that the benefits of the successful economy, which can only happen if it is, as in the earlier example, protecting it from pirates, flow to everyone in what seems to be a fair distribution. It has to do this in such a way as not to stifle initiative, enterprise, innovation, the keys that make markets adapt to changing realities and ensure that more and more wealth (goods and services) continues to be created. It cannot do this without some form of income redistribution, but it must strike a balance that continues to reward progress and initiative, and it needs to do so without taxation levels that are perceived by the most potentially productive members of society as punitive or confiscatory, sending them scurrying to their lawyers and accountants, or even to tax havens, rather than to productive enterprise.
Further, as markets adapt, people are caught in the middle. In young economies, like Alberta until recently, the sense is that everyone can succeed. Many people were drawn to these economies because of opportunity: there is a tendency to see individual initiative and work ethic as the sole criteria of success, and to believe that one is responsible for one’s fate. In such societies, there is less need for, and tolerance of, support for those who do not find success. In older economies, where there has been stable employment for generations, the dependency of the population increases, and it serves the employers who enjoy lower wage rates because of it. When major shifts occur, creating structural unemployment, there is often some understanding that the employees could not have prepared for this, and that the gap must be bridged until the disruptive innovation or other market change can create replacement opportunity. In a society with significant immigration, people are aware that circumstances also drive opportunity: they know they were the same people in their previous countries and were not succeeding, and now they are, so they know that the environment for success is as important as the drive of the individual. Such people have initiative and work ethic and want to be rewarded for it, but they also understand that the lack of success of others may be circumstantial rather than a character failure. (Good books to read on this are Jared Diamond’s Guns Germs and Steel, and Arnold Toynbee’s A Study of History.)
The rich get richer, the poor get poorer without redistribution. In the absence of ordered, democratically managed redistribution, there will be disorderly, unmanaged redistribution, in the form of crime or revolution. If you want a happy, healthy society, you need to manage free markets to some degree. The trick is to do it without stifling independent enterprise and without crushing innovation. It also has to be done in such a way as to maintain individual responsibility and accountability. Like everything else in life, it not one way or another, it is a constantly evolving balancing and rebalancing act. This has implications for issues like freedom and society, the individual and community, that are important to align with our more basic needs provisions. Humans have needs and wants above those of material goods, and once material needs are satisfied, we have the luxury and responsibility to pursue them. For my part, freedom should end only when it impinges on the freedom of others, and the human capacity for creativity in all spheres should not be unnecessarily limited.
At the moment it could be argued that the left has gone too far left, and the right too far right, so that finding the balance over time with an ebb and flow between them, as their political representatives come and go from power, is difficult to do. In the current polarised environment, people take extreme positions (“redistribution is always wrong”; “private enterprise always does things better than government”; or “we need everyone to make the same amount of money whether they work or not”) which are clearly wrong. Governments do the same, often dismantling everything their predecessors did because of ideological incompatibility. This means instead of moving forward, we lurch at the policy level from left to right and back again. All of this reflects a general thirst for oversimplification. Ideology is not a substitute for actually thinking about the whole complex structure of making a fair society with equal opportunity and where enterprise and contributing to the economy are rewarded.
Clearly, you can’t share a cake you haven’t first baked. Sometimes, the left seems to focus on sharing, without adequate attention to how it is baked. This is childish in the way that children assume mummy and daddy will always feed them. The right on the other hand sometimes only cares about making more cakes, and not being made to share. This is childish in the way greedy children won’t share.
Concerning Polarised Politics Today
Over time, generally, Western countries have achieved a fairly central balance between the demands of social cohesion, stability, peace, fairness, and the demands of incentives for risk, initiative and hard work. It varies over time. I think the US is off track on this, with the parties in twin monologues with entirely different talk tracks and no dialogue, each hijacked by its extreme fringes, such that the middle ground is vanishingly small. It is preferable to have a centre left party and a centre right party making small changes back and forth over time such that a good compromise prevails generally. I am concerned that we are moving towards greater polarisation in Canada. I believe current tax rates are confiscatory and will lead to avoidance, growth in the untaxed underground economy, and productivity loss with productive people spending their time tax planning instead of creating and developing opportunity. Nonetheless, as a business person, I recognize that I benefit not only from my own education and preparation, but also from the fact that my employees arrive at the door already able to read, write and perform calculations and other business functions. They come to work on roads I did not build and on transit I did not manage and are looked after by doctors and nurses and hospitals without my having to train, plan or build. I get proportionately more benefit from the infrastructure paid for by taxes because I leverage these investments over my employee base, and so I should pay a greater proportion of my income in taxes. I do not resent taxes, I think I was lucky to make enough to have to pay more, and lucky to live in a system that gave me the freedom to do it and supported me with educated employees and customers, safe streets, and a generally happy population that seemed to feel that my rewards were to be respected and not resented.
Once you agree that redistribution is necessary, and that circumstances out of individuals’ control contribute to their opportunities to both contribute and benefit from society, as most centre left and right people do, then it becomes a question of management. It is possible here for government to learn from business in this area. Government differs from business in that it must serve all citizens, where businesses can choose whom they serve: e.g. cost-conscious business customers, rather than high margin business for whom savings are not as important as revenue growth. Or people who want luxury cars, not people looking for fuel economy. Or people who value beauty over utility. Government must govern for all the people, even those who did not vote for it. NeverthelessNevertheless,on the issue of productive investments versus overhead costs government faces the same need to achieve as good a ratio as possible as business does.
Government and Business: Similar but Different
In both business and government there are two kinds of costs: what, in my own business, I used to call “fur-bearing animals” (sales people, manufacturing employees, service technicians); and “burden”, or overhead (accounting employees, contract managers, some management). For maximum productivity, you want a high ratio of “fur-bearing” to “burden”. So, as little overhead as possible, as many value creators as possible. In this model, both government and businesses have both components, and so does the country. It is tempting to oversimplify, and say that in a country, government is “burden” and business is “fur-bearing”, and they do tend in that direction. But a government paid nurse is not “burden”, and a business controller is not “fur-bearing”.
Businesses, because they are subject to the discipline of the market, the demands of their customers and especially competition, self-correct for these ratios, and keep overheads as low as possible with respect to the productive component of their organizations. They automate whatever they can, and use specialisation both internally to improve productivity, and externally, through outsourcing and otherwise.
Government is another kettle of fish. Everyone is the customer of government, and so can’t easily choose to buy the services it provides elsewhere. Government has all the characteristics of a monopoly business, including the regrettable ability to raise prices (taxes), with the further feature that it can and does do enforcement as well. Even in a democracy, where consent is given through the vote market, those who vote for a different government must buy with their taxes the services of the government the majority has chosen.
With its ethos of territorialism and guardianship, government intuitively looks to control and regulate. This leads to more overhead and less productivity, as bureaucracies are required to administer and enforce regulations, incentive rebates, tax credits, and other mechanisms governments use to give effect to their policies designed to create a sustainable society.
However, a different problem arises when people from the private sector misunderstand the purpose of government and believe it should “operate like a business”, whose purpose is to create wealth. They see all regulation and everything government does to reduce social friction and ensure environmental sustainability as “bureaucratic red tape” “burden”: barriers to growth, rather than realizing that those things are the job of government and that business needs government to do them, much as the sea-faring merchants in the earlier example needed government to keep away the pirates.
Government needs to leave wealth creation to business, which as much as possible should be disciplined only by the market, and not by regulatory bodies. Business needs to leave sustainability to government, which as much as possible should only be disciplined by the ballot box, and not by paid lobbyists or campaign finance influence. There is such a thing is too much government, and such a thing as too little.
In general deficits increase under Republicans and go down under Democrats, both federally and at the state level. Republicans are focused on tax cuts, which reduces revenue and thus adds to deficits. It has been shown time and again that if you put money in the hands of lower income and middle class people through education and health subsidies or higher wages, they spend it, which causes the economy to grow, and this means more tax revenue and lower deficits, plus actual value for tax money in the form of social programmes, which lead to greater social cohesion and peace, lower crime and happier countries. Tax cuts for the wealthy do not trickle down, on the contrary they create higher wealth concentration and greater divergence between the rich and poor, and lesser social services, leading to less sense of community, more “every man for himself”, less social peace and more crime. The wealthy grab as much as they can all the time, Republicans make it easier for them to do so, but they have no trouble getting rich under Democrats: they are not the people who need government help, the poor and the middle classes are. The wealthy have more than enough ways to gain and keep influence and power without the middle classes and the poor being duped into voting for parties that only care about those who can already do very well for themselves.
Keeping in mind this understanding of clashing frameworks (which are both necessary and not mutually exclusive) we can deal with the big questions facing our countries today. For example,on the issues of tariffs, and carbon tax.
If we take the modern example of carbon tax, we see how the government tendency to use regulation rather than market forces could lead to increasing the costs that must be borne by the wealth creation sector by layering on a new bureaucracy overhead (“burden”). For the sake of argument, let us agree that we need to reduce the consumption of fossil fuels so that less carbon goes into the atmosphere, and that our population had given the government a mandate to do so. There are two ways to do this: regulate it, through enforcement (this would be the natural government approach, the more left-wing the government the more likely this would be the solution normally, although we are seeing the opposite at the moment in Canada); or make it more expensive (so people use less) by including the cost of the future damage of the carbon emissions in the pricing. This would be the Preston Manning approach. Surprisingly, this is the approach the left has taken in Canada, while the right, consistent with its no tax mantra, but inconsistent with its market orientation, is calling for regulation.
The left, unfortunately, has not stopped there, and has not been able to resist the temptation of social engineering that is its mantra in opposition to the conservative no tax one. Instead of reducing other taxes so that the new tax does not hurt the poor, but only changes everyone’s behaviour over time, the Ontario Liberal government decided to use the money to provide incentives for electric cars and for triple-glazed windows and heating and cooling upgrades and other projects which would reduce carbon emissions. (AdditionallyAdditionally,it allocated some of what it called the carbon cap and trade dividend to school renovations and community housing projects its profligacy had made it impossible to fund from general revenues without moving income tax up to levels that would inspire evasion and revolt.) To do this, they need people to administer and enforce these programmes, which means overhead (“unproductive burden” in my terminology). Using pricing alone would have adjusted behaviour: if emitting carbon is expensive (but I am whole with respect to disposable income with corresponding tax reductions elsewhere, and I can have more money in my pocket if I figure out how to emit less), I will make changes like triple-glazed windows and fuel-efficient cars on my own. As a further example, concrete manufacturing is carbon intensive. Concrete would become more expensive, leading builders to seek less carbon intensive materials and concrete manufacturers to seek out ways to reduce their carbon output.
(How we make decisions to deal with these kinds of challenges and then manage the implementation of these decisions is critical to the future of organized human life on earth: a good read on this topic is Jared Diamond’s Collapse. Government transparency is key. A good measure can be undermined when, as in the case of the cap and trade carbon reduction scheme in Ontario, government succumbs to the tendency to fund other things when presenting the scheme as designed to drive carbon reduction. This engenders cynicism in the voting public and makes citizens prone to strike out against the tax, electing a government opposed to it, even when there had been in the first place general public support for measures to reduce carbon output.)
Carbon pricing is a case where we see government providing needed leadership to protect the resources which allow us to create wealth and ensure we are sustainable. The problem is in their management of the implementation, where they choose the regulatory approach to making the tax work, rather than letting pricing give the market the information it needs to change its behaviours. This kind of thing is in government’s DNA. A regular infusion of people from the private sector with an understanding of how to keep overhead burden low and productive service delivery high by harnessing market forces rather than adding bureaucracy would be desirable.