Tuesday, August 14, 2007

In Praise of Profit

In this blog I will address what is perhaps the greatest misunderstanding of contemporary politics – the role of profit in society.

It has often been assumed by many of those in on the left, and plenty in the National Party too for that matter, that the attainment of profit is somehow both dishonest and at odds with the public interest. This over-riding assumption recurred throughout the respomses to my last blog. One commentator put it into a simple equation: ‘Health objective= betterment of the people. Firm= profit max.’

However, this belief is based – whether known by the holder or not – on a Marxist conception of commerce that is both outdated and largely discredited. The ideology behind the assumption profit vs. people argument rests on several fallacies.

First it is assumed that the process of attaining profit is somehow separate from the public betterment. That is, that my attaining wealth is not a product of public betterment.

Furthermore, it is assumed by such an argument that the amount of wealth around us is fixed. If there is X wealth, then for every winner there must be a loser. To the Marxist, if I engage in a profit-making exercise I do so by exploiting another for the difference between cost and sale price – I give to them my good or service only at a higher value than that which it cost me to produce. In taking profit I have sacrificed the public interest for my own.

The reality is considerably removed from this proposal however. Prosperity rests upon us each maximising our potential, and profit is the foremost driver and reward of achievement. I quote Jeffrey Sachs, who says:

"the world is not a zero-sum struggle in which on country’s gain is another’s loss, but is rather a positive-sum opportunity in which improving technologies and skills can raise living standards around the world." ('The End of Poverty, p.16)

The question I pose to the holder of the profit vs. people argument is: What if the public betterment, far from resting in conflict with profit, was in fact a product of that profit? That is, no profit = no public betterment.

It is my argument that the primary requirement of profit is the betterment of others. I argue that capitalism is, ironically by its competitive nature, a state of affairs conducive to the maximization of co-operation and thus achievement.

How? You see, when I receive profitable payment I do it not because I have exploited someone or used them just for my gain. I receive it because I have helped them. I have provided them with a good or service requiring my co-operation that they could either not provide for themselves or could not do so as well as me. That they took greater pleasure in the acquisition of that good or service, or at least expected to, than they did in having the resources forgone to pay me is certain because otherwise they would not have bought it. Thus, when I make a capitalist transaction I am both helping people and expanding wealth. There is nothing wrong with doing something purely for profit, because regardless of intent I am helping others. Far from exploiting my customer for the difference between cost and sale price, I have offered a good or to service to them at a price equal or less than the satisfaction they gained from its consumption. A good or service that without the incentive of profit to produce, I would not first have created!

This reality is brought about by the competitive nature of capitalism. When I compete with someone else I must outdo or at least equal them. I must be equally or more efficient than them. I must offer an equal or better quality than them, in the same or less time. The necessary consequence of being uncompetitive is failure. And herein lays the beauty of it. In the market, it is the consumer, not the producer – the profiteer – that is king. The profiteer must offer the consumer the greatest help for the smallest relative price, or the consumer will not allow them profit.

The Poor Fitness of New Zealand's Health System

With Michael Moore’s new documentary ‘Sicko’ being released not long ago, I must say, it is of great disappointment to hear it discussed and defended. We need to identify Moore’s dribble for the propaganda it is. Sadly, his idea’s are consistent with those of many New Zealanders inside parliament and out.The practicalities of providing a public health system for 300 million Americans are, well, non-existent. New Zealand remains a case in point as to why we need a much higher private sector involvement in the health system.

I particularly like the point made by Rodney Hide in his new book, with regard to his travels in Eastern Europe in the late '70s. Discussing a meal he had enjoyed with some local citizens:

"The food was pretty shocking but in their eyes it was a meal fit for a king. After I had eaten, Anna asked me if I would like an apple and I said that sounded good. She brought me the apple on a plate so proudly. It was a small, half rotten thing and I was shocked that I was expected to eat it. In New Zealand, we would throw such an apple out. But Claude and Anna were looking so pleased with themselves that I had no option but to eat it... I know exactly what happens if the state takes over the production, transportation and provision of food: big queues, shortages and rotten apples! I'm always amazed that we run our health system like the Romanians ran their food production and distribution, and then wonder why it doesn't work." (p. 97)

I looked at that paragraph and thought bloody hell, he's right. Every year the government says they'll put more into health to fix the problems with it, and they do, and every year the waiting lists get longer. And you start to think, when the public health system takes up 40% of the govt. budget as it does - 17% of our entire GDP - maybe lack of funding isn't the problem. We’re not operating our health service as a market system, and not surprisingly the result is that the state owns a poor quality monopoly.

People say 'but at least everyone has access' - but they don't! You have to wait months sometimes years to get the most simple of things done! Many people die before they get treatment. People say, 'but if we had private hospitals they might cut corners on quality to make extra profit'. But what quality do you get in the public system!?!? And how many people have you heard complain about the service if they've been to a private hospital?!

The truth is, it’s all about competition – in a private system if a firm fails to deliver the goods, you take your business elsewhere and they don’t make a profit, the result is that only firms who deliver can stay in the market. In a monopoly however, and the state provision of health is just a publicly owned monopoly, you don’t have the choice, and the staff make the same no matter how they treat you. Only a market system can respond to the health needs of New Zealanders.

We don't even have to fully de-centralize our health system to make it more effective, even just sending the public into private hospitals and picking up the tab would make a huge difference. It would have to be gradually changed for infrastructural reasons of course, but entirely possible over the space on 10-20 years. It wouldn't even cost as much to do. The average cost per minute to the taxpayer of a public hospital operation is $42. Forty-two dollars! In the private system it's less than twenty-five. That figure could increase by 30% and yet still we'd have a better service at a lower price. But still no traction from Government, only ACT has this as their policy. And this is the so-called rich man's party!

Milton Friedman's ideas really ring true here; That when I spend my money on me, I want good quality for a good price, when I spend my money on someone else I want a good price but care little for the quality and vice versa, and when I spend someone else’s money on someone else, I care neither for the price nor the quality.

Tuesday, July 31, 2007

Lessons From Japan

All this talk about inflation and the likes, the topic of my last two blogs, reminds me of a situation in Japan in the early '90s. I was not in Japan at the time of course, but have read about it since, and the parallels in nonsense are worthy of note.

In 1993, after experiencing high growth rates for over a decade, the Japanese were less than impressed when their GDP increased by only 0.4%. The next year proved dismally better, growth increasing to only 1.1%. On the assumption that tax cuts would result in a massive increase in spending - adding to inflationary pressures but also stimulating demand for Japanese goods and services - the Japanese government substancially reduced its tax rates.

The problem however, is that the whole idea that tax cuts are inflationary or dis-proportionately increase spending is absolute nonsense. The reduction in taxes in fact saw a sharp increase in savings, dis-proportionate to the increase in spending.By 1999, after a state spending binge to get themselves out of the poo, Japan was facing not inflation but deflation (The woes of deflation I will not go into here, but as a problem it can potentially be far worse than inflation).

The point is, that the whole dominant Keynesian idea of inflation on which the Labour government has based its policy is wrong. Milton Friedman realised this some time ago, but economists and politicians have been a little slow to catch on. As a case in point Japan shows that, far from the beliefs of Dr. Cullen, decreases in taxation are not at all inflationary. Considerably less so if the money taken in by taxation is spent ineffectively by central government - as we can almost guarantee it will be.

Saturday, July 28, 2007

Don't Buy Inflation Bollocks

With the reserve bank raising interest rates again yesterday to a level now of 8.25%, it is simply amazing that some people seem to be buying into Dr. Cullen's argument that tax cuts are inflationary. After eight years of Labour government, seeing minimal wage growth and little improvement in our economic prospects, alongside continued growth in state expenditure, how can we expect that the current high tax/high central expenditure road will fix the problems of inflation and the dollar.

On the contrary to our beloved finance minister's belief in the inflationary qualities of tax cuts, high taxation and government expenditure are by far the biggest pressures on inflation. This is for several key reasons:

1. We now have 190 000 civil servants in a labour force of around 2 million, earning an average of $28 an hour. These public sector workers are largely unproductive economically - driving down the productivity of our labour force while putting pressure on a tight labour market - a key ingredient for major inflation.

2. With middle income earners shouldering a tax burden which can only be considered irresponsible and inconsiderate on the part of the current policy makers, its never been harder to save. With morgages also reaching new heights, it is entirely safe to assume that tax relief on middle income earners would see a sharp increase in both savings and debt repayment, dampening the over-heated debt market and giving much needed relief to the exchange rate.

3. The rapid expansion of the welfare state over the past eight years has also driven inflation and our exchange rates over the edge. Lower and middle income earners relishing in government payouts have pushed consumer spending and imports through the roof, driving inflation and our current accounts deficit.

4. A heavy tax burden on high income earners, that can be matched off against mortage repayments, has also made investing in property increasingly attractrive. The increased demand, combined with a general upward trend and heavy regulation preventing the construction of new homes, has pushed housing prices skyward. The result of the housing boom has been an increased reliance on foreign investment capital, flooding the economy with cash and again forcing inflation and the dollars value sky high.

The only viable long term solutions to New Zealand's inflation and currency problems are: a steady decrese in middle and high incomes tax, seeing savings increase, debt decrease, a decreased reliance on foreign investment, and a dampening of the propery market; a relief of labour market pressures by steadily reducing the size of the public service; and a decreased regulatory burden allowing for increased productivity and real wage growth.

Friday, July 27, 2007

This being my first blog on the new sight, and readers of my old blog expecting something a little right of centre, I thought I'd start out - in the spirit of fairness - by conceding a topic to the left. The problem was of course finding a workable left-wing argument. It wasn't easy, but after reading about Fox New's latest coverage of Michael Moore's new documentary 'Sicko', I knew I'd hit the jackpot.

I might start by assuring you all that - despite the best of intentions - Michael Moore has the brain capacity of a 14 year old suffering from chronic alcoholism. However, Fox New's response to his call for a fully funded public health system in the US certainly gives him a run for his money. Fox's Jerry Bowyer has responded to Moore by identifying public health as - you guessed it - a terrorism risk. Yes, don't re-read that sentence, you got it right the first time. A terrorism risk.

As evidence, well, Bowyer didn't seem to have much. All I can ask is for you to please not consider him - or the Republican Party for that matter - as representative of the right.

This one I dedicate to all you trendy lefties out their about to submit yourself to two hours of contempuous dribble when you watch Sicko. But don't let it go to your head - watching Michael Moore causes cancer.