April 05, 2013

Horse 1458 - Collective Purchasing Decisions

Let me say something which is so hideously terrible, it will make you think that I'm some sort of crazy person:
The Roman Empire produced nothing.
I'm now going to say something equally as terrible:
Nike, Mitsubishi, Apple, Heinz and BHP also produce nothing.
In fact, no government, no company, no mutual society, no club, no partnership and no trust foundation, has ever produced anything at all, ever, in the history of everything.
OK, this sounds incredibly bonkers and I will admit that I induce argument and discussion by saying so, but what I've said is not only 100% true but also fundamental to destroying other equally bonkers myths and rubbish that people like to spit forth.

In essence there are only two absolutely fundamental ways to make money - work and win. Of those, the latter of the two is actually just a fancy way of saying, benefiting from other people's work. Everything ever produced in the entire of history has been made because of people's work.
Economics 101 classes will tell you that there are but four factors of production: Land, Labour, Capital and Enterprise. In other words: the stuff that things are made of, someone's work to make them, any machinery used to make them and someone to manage the whole process of how things are made. Companies, government, mutual societies et al. are merely methods of organising collective decisions of how and what to produce.

Assume for a second that there is a security guard standing outside of building. Also assume that this security guard is paid $75000 a year for their work.  Really it makes no difference if they are paid by the government and have the title of Policeman, if they are paid by a private company and have the title of Security Guard, if they are paid by a provident society and have the title of Footman, or if they are paid by a gangster and have the title of Hired Goon.
Same person, same job, same pay, same service being provided. The same amount of land, labour, capital and enterprise is being employed and really, although people might like to put a spin on it, neither the government,  private company,  provident society, gangster or whoever employs this person is producing the service, it's the person being the security guard standing outside of the building.
To take another example, the only real difference between a building society and a corporation is the legal treatment of the two. There are numerous examples where for legal advantage and taxation purposes, building societies have decided to incorporate and become banks but the actual difference between their business was precisely nil. They still performed the same function, produced an identical service and even carried the entire balance sheet of assets, liabilities, profits and equity over.

During the course of my job as an accountant I see all sorts of organisational structures and really the only difference from an accounting standpoint are the titles on the various documents and the amount of taxation due; hence the reason why people tend to favour one organisational structure over another to perform various functions.
We do the accounts for several gyms; all flying under the same franchise name. The various gyms are owned by companies, partnerships, in some cases individuals and in one odd case, local government. They all provide the same service and the clients have no idea and no care of the organisational structure behind them.
This is also a noteworthy thing. Clients of a gym, visit and pay their fees to use the equipment. Really the only reason they do this is that individually none of them would usually be able to afford the entire range of gym equipment for their use, but collectively their decisions to pay their fees is in effect nothing more than a complicated series of purchasing decisions. Taken to its most extreme, the only real difference between a gym and the government is the scale. When we pay tax, all we've done is enter into an even more massive and even more complicated series of purchasing decisions.

Really, it all comes down to, is a series of heated public argument as to how to make those massive and complicated series of collective purchasing decisions. Surprisingly, companies, government, mutual societies et al. are , not only produce nothing, they also consume nothing. Consumers, ie people consume things and although firms may make use of resources and even use them up in the course of producing goods and services, essentially it's still just a series of collective purchasing decisions designed to create outcomes.
The various forms of structural organisation do however make distinct differences. Not only do they determine the shape of the collective purchasing decisions as to which goods and services produced, they also determine the circumstances of entry and exclusion to those goods and services.

There was a rather embarrassing study commissioned by the components of the Dow looking into the level of waste in both government and the private sector. After looking at a large number of companies and counties, cities, state and federal departments, it found that the private sector on average was between 9-12% more wasteful than government.
So then, when I hear that government produces nothing I agree with people. I also tend to ask questions to prize open the level to which they believe that private enterprise is a panacea to cure everything.  Granted there are a considerable number circumstances where for certain reasons, the private sector is far better equipped to produce goods and services (mainly where the optimal sharing group is small), if the private can not, does not or will not produce goods and services, then a pretty strong argument can be mounted that government by inference is the only entity capable and willing to produce them; this usually occurs when the services and public goods in question are massive in scale.
Mostly though, the argument that "government produces nothing" is actually a cover for "I don't want to pay tax"; that in itself is an extension of "I don't want to pay for anything". Less often it's an argument for the deliberate exclusion to goods and services on the basis of wealth and class. Either way, I still tend to doubt if the person who makes it has thought much beyond their own immediate wants and desires.
Government produces nothing, private companies produce nothing - land, labour, capital and enterprise produce things - and I'd prefer it if you just gave me stuff.

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