"The world is not ruled by the engineer, thinking only of production, but by the businessman, thinking only of profit" Henry Hazlitt in his 1946 book Economics in One Lesson. Centuries before and decades later, profit continues to make the world go round. "The businessman will run out any object as long as there is a profit in doing so".
Welcome to Part VIII, and perhaps a clarification is in order. The humble objective, at the time of embarking on this series of articles on Profit, was simply to accentuate state profit. Originally the plan was to conclude, latest by part IV, that there was a need to jettison prevalent wisdom decrying state intervention and aim the crosshair at achieving a profitable state. Serendipitously, the venture ended up in no mans land between Keynesian and Austrian schools of thought, a contest, although in its infancy, as emotionally charged as the immemorial war between the East and the West.
Funnily enough, in the former altercation, both camps appear to have lost, although either loathes admitting the obvious. As an example, the Laissez Faire proponents vigorously professed that national deposits are better managed by the private sector. The argument being that state owned banks are managed by untrained civil service officers whose primary virtue is, well, anything but banking which coupled with absence of ownership is a recipe for bad loans and eventual government financial support. The aftermath of sub prime and euro debt crises, is eerily familiar.
For those who are wondering, Keynesian measures became unfashionable in the late 80s, thanks to stagflation. Interestingly, if you have ever come across Kelvin Lancaster and Richard Lipsey's paper "The General Theory of Second best", Laissez Faire never had a chance. Since no market is perfectly competitive, a perfectly efficient outcome is a myth. The second best theorem showed that, in the context of public policy, if the real world digresses from perfect competition in one respect, the outcome would be worse than any second best alternative, such as a planned economy! Fewer trade restrictions are not the same as zero trade restrictions.
Nonetheless, this write-up seems to have deviated from the path as well. Recollecting, it was established that profit-makers were essential for fulfilling the state's profit objective. However profit-makers need an enabling environment in which exigency was catalytic in Xeroxing the Ministry of Profit (MOP). The most critical attribute of this Ministry is that it acts as a sort of buffer between the bureaucracy and the profit-makers, eliminating political interference and nepotism while at the same time proactively monitoring state businesses. Constant repetition of this fundamental issue cannot underscore its importance; independence of MOP is the singular most fatalistic assumption. If the MOP is politically compromised in any way, least of all through political appointments, the entire edifice collapses. Think tank brainstorming is required to arrive at a viable option for its structure. In the meanwhile, reflections continue towards identifying the authority of the MOP, it cannot be a toothless tiger, Godspeed.
The table provides a reference to earlier parts, all published in Business Recorder. One remains cognisant of a friendly comment that the series seems more like a book, however, the mind is limitless. "The wisest have the most authority" Plato. Idealistically, should the state be farsighted and fortunate enough to select and appoint the wisest as the stewards of the MOP, further deliberations are futile.
Re-visiting the second best theorem however, in the real world, barring miracles, authority needs to be defined and appropriately vested. Once again drafting rules of business for the MOP is way outside the scope of this effort and is best left to the professionals.
In terms of an overview, it would also be better to learn from the best rather than reinvent the wheel. The first step is to identify the MOP's domain, which as articulated by the Chinese are the strategic and pillar industries. These oscillate between defence, electric power, petroleum, telecom, coal, civil aviation, shipping and equipment manufacturing, auto, IT, iron, construction, surveying. Strategic industries are wholly owned by the state while in pillar industries the state has effective influence.
Imitation requires imagination; changing horses in the middle of the race will require skill and nerve. Most likely, initiatives will require a prospective outlook. Even in a semi-planned economy, state monopolies need to be considered on a case to case basis, tracing short and long-term consequences on all segments of society. As previously discussed, mature industries with average general profits and industries where state interference can negatively impact domestic markets are to be shied away from.
Having navigated this initial hurdle, the state-owned enterprises SOEs become the engine of growth and as in China are used for development, stimulating the economy, technology transfer and for creating employment. Notwithstanding productivity, understaffing SOEs is like circular debt.
The SOEs make more profit, which goes back to the government in the form of dividends to be utilised for addressing income inequalities through welfare programmes. Isn't providing employment in the first place a more desirable alternative? Obviously, surplus costs will need to be treated as a separate block for purposes of monitoring performance.
In lieu of their assistance in economic growth, the MOP provides strategic industries with complete and total protection. In China, state-owned banks provide unlimited capital to SOEs. Government procurement is tilted towards supporting SOEs. State industries get preferential treatment in allocation of raw material and power. Major investment inside China and all investment outside China require government approval. SOEs are provided with subsidies and tax incentives and where necessary barriers are created to restrict new entrants.
All of the above sounds dictatorial. Unfortunately, over time economic theories have come to be associated with forms of governance, democracy with free markets and dictatorships with planned economies. Probably, F. A. Hayek's, "The Road to Serfdom" has a lot to do with these perceptions. Nonetheless, as discussed in the previous article, failure of free markets does not suggest that democracy is flawed and vice versa. Why can't a democracy operate a planned economy? The fundamental issue is to divorce economic planning from politics, absolutely.
Whatever the form of governance, the key issue is to churn a profit year on year, which in the case of the state is an increase in national assets, on a net and real basis. Broadly speaking, the only precedent condition for such state intervention is that all actions and policies need to be individually considered on merit with both a long and short term perspective on making a profit only, rather than the greater good of the largest number.
Finally, continuity of leadership and consequently policies is the crowning factor. History of corporations, including domestic, provides significant evidence that successful businesses enjoyed uninterrupted visionary leadership for decades. Accordingly, MOP should have continuity in its leadership, as far as practical.
The MOP should in short be resilient and should be vested with complete authority to circumvent or override any conflicting legislation, which limits the role of SOEs as engines of growth and Profit. In the next part we take on the key difference between the private and public sector management, Insha Allah.
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PART TITLE DATE
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I PROFIT IS SWEET 25 Jan 2012
II STATE FOR PROFIT 07 Feb 2012
III THE PROFIT-MAKERS 22 Feb 2012
IV PROSPECTING FOR PROFIT-MAKERS 01 Mar 2012
V THE PROFIT ABODE 07 Mar 2012
VI THE MINISTRY OF PROFIT 19 Mar 2012
VII BACK TO STATE PROFIT 28 Mar 2012
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