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The ‘Private Sector’

January 5, 2012

The “Private Sector” is a very popular term that’s embedded in our politics and in mainstream and not so mainstream economics.  Those of us seeking a better world, though, need to banish it from our discourse as it communicates so little while hiding so much.

The “Private Sector” is widely understood to be the “sector” that operates outside the government.  But which industries actually do so?  Are Lockheed Martin, Northrop Grumman, or Boeing in the “Private Sector” when the bulk of their business comes from government?  Or the banking industry whose business model of high leverage couldn’t exist without government deposit insurance or a government lender of last resort we call the central bank?  All of finance is tightly integrated with government and it’s highly dubious to consider it private.  Witness the unsurprising speed of the recent public bailouts of these “private” firms.  How about the railroad industry of the past, the key driver of the 19th century economy, which crucially depended on public land grants?  Or the automobile industry which wouldn’t exist without public roads?  The entire socioeconomic system of mass production capitalism, in fact, is integrally dependent on government and wouldn’t be long for this earth if it lived solely through “private” means.  We can easily imagine the unemployment and purchasing power calamity that would ensue if the US government terminated its massive injection of purchasing power from military spending, research, and “entitlements”.  Or if the European states ended all spending.

We’re in a holistic system that can’t easily be thought of as either “private” or “non-private”; only the combined whole has meaning.  The “Private Sector” can’t exist by itself and the term therefore offers us very little.  But it hides a great deal, and no doubt that’s the reason for the widespread use.

What better cloak to hide the reality of a system of power in which the top 5% own 72% of financial wealth and the bottom 80% just 7?  It’s not an oppressive oligarchy that’s ruling the roost, it’s the “Private Sector”.  We’re told we must enforce austerity because our debt to the “Private Sector” is excessive.  But of course the debt isn’t owed to a “Private Sector”, it’s owed to a tiny fraction of the population that’s better identified as “The Owners”.  And the underlying system in which this debt has meaning isn’t at all private; it directly commands the lives of every person on the planet and is therefore public in every sense.

I cringe every time I hear “Private Sector”, as I also do with the next most popular term for the oligarchy – “investors”.  We can measure our progress by the degree such Orwellian words are wiped from the language.

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  1. Vincent permalink

    Add “self-made man” to the list of words for elimination.

  2. A Self Made Investor in the Private Sector. Has a ring to it.

  3. Dave permalink

    Hold on. Now you are coming into my ballpark. I appreciate the holistic comments, of course. The idea that one sector should be antogonistic to the another is absurd. But I sense a bit of hypocrisy here, in that you are giving it back the other direction. A true Post-partisan politics (& economics) will have to bring Governments, Firms & Households into partnership if we’re ever to achieve something resembling an economic democracy

    As far as the word “investor” goes, I happen to dig rehabbing old buildings and houses for future enjoyment and benefit. I don’t see that as a useless enterprise. And I’m hardly one of the oligarchs you deride. I have no problem attaching the label “investor” to myself.

    @ Vincent (& Jim): Word elimination? Orwellian indeed.

    • Andrew permalink

      When you say that you rehab old houses, what do you mean? I think that when most people think of investment, they are talking about, say, investing in a company that rehabs old houses with the hopes of return on their money for doing no work at all. All an “investor” does is to provide capital. If you are planning the house rehabs or doing some of the work yourself, you aren’t an investor, you’re a producer. Payment to your for your labor (in the broadest sense) is no different than being paid to work for someone else at a job. Adam Smith makes this distinction clearly, yet people seem to forget that Smith didn’t suggest that capitalism is simply about making a profit. He correctly foresaw the future in one respect:

      “In a country fully peopled in proportion to what either its territory could maintain, or its stock employ, the competition for employment would necessarily be so great as to reduce the wages of labour to what was barely sufficient to keep up the number of labourers, and the country being already fully peopled, that number could never be augmented.”

      And then he got it wrong – not understanding the role of technology and tremendous barriers to entry:

      “In a country fully stocked in proportion to all the business it had to transact, as great a quantity of stock would be employed in every particular branch as the nature and extent of the trade would admit. The competition, therefore, would everywhere be as great, and, consequently, the ordinary profit as low as possible.”

  4. Dave permalink

    I would fall into the latter category, although the 1st “capital” at risk is usually mine, so I still think the term applies. But I don’t really have a problem with the 1st definition, either. If you “euthanize the rentiers” then basically everyone is going to be doing hard labor till they die. Personally I think those of an appropriate age SHOULD be living off their savings, and part of that means “investing” their savings passively in productive endeavors while doing no work at all. My issue is that I think that situation is all too rare, and not that we have too many of them.

    • Andrew permalink

      In order for people to live off of their savings, they have to earn enough during their working life. There’s nothing wrong with that as such, but many people don’t earn enough these days for this to happen. Should people live impoverished retirements because of this? We haven’t even begun to see the pain. Working people like me most certainly don’t have enough savings. Our fathers are living off pensions that are no longer part of the contract knows as “work.”

      What real good comes from this passive investment? Do you think that one should be forced to risk a decent retirement on some business venture over which one has little to no control?

      What is the real benefit to saving for retirement over simply having society take care of people during retirement (social security or some such program). I don’t see one, but I haven’t thought about it that hard.

      • Dave permalink

        Social security is saving for retirement. It’s essentially forced saving, the only difference is the return is guaranteed. “Do you think that one should be forced to risk a decent retirement on some business venture over which one has little to no control?” No, I don’t. Do not risk your retirement unless you know full well you may have to work longer if there is a loss. But saving by stuffing everything in a mattress doesn’t go very far, even for the most frugal workers.

      • Andrew permalink

        Social security is not saving for retirement, really. It’s a tax. It takes money out of the system.

        When you receive a social security check, you are getting a direct government disbursement – it’s not like the SS tax you paid the government was sitting in a box somewhere waiting for you to take it out.

        To some extent, it is semantics, but it does matter in that even if the SS trust fund were to run dry, the government could issue SS checks. Also, if the SS trust fund could, actuarially speaking, issue checks to everyone and have money left over, it has no obligation to raise payments. Singapore uses it’s SS-like system to regulate money supply in just this way — when inflation goes up, the contribution rate goes up and when a recession hits, the rate is dropped.

  5. I agree completely with Andrew and also with Keynes in that the rentiers should be euthanized. The very concept that the well being of society requires private risk and competition is, IMO, barbaric. If a home needs repairing, why don’t we just repair it? Surely we have enough labor and our knowledge of fiat currencies assures us financing isn’t a problem. On what basis should one make a profit or interest on such a venture?

    Future societies, if we survive, will look back on the past few thousand years in the same way we look at the stone ages. We need to to dampen our “animal spirits” before we can progress to a better level.

  6. Dave permalink

    Jim, I appreciate your point, but that’s not the world I live in. What should I do? Stop trying to feed my family? Should I stop using the knowledge I have, doing something I enjoy doing because the system is immoral?

    Furthermore, I have less of a problem with the Hayekian system of competition than you do. I think it provides for advancements in technology and knowledge that a more statist system would not. I could be wrong about that, I don’t think I have nearly the depth and breadth of education in economics that you do. But you are living 300 years ahead of your time. I’m living, and in the labor force, today.

    Also, if you don’t maintain some notional demand for the currency then you are going to end up having problems.

    • Dave permalink

      @ Jim. So how do you reconcile needing more savings for leisure with “euthanizing the rentiers?”

    • Andrew permalink

      Well, what choice do people really have beside currency? Those currencies may not be national, but barter systems turn into currency system very quickly because direct barter is so darn inconvenient and doesn’t allow for savings. Currency is also a by-product of debt – almost all money represents debt. I can’t see people going back to a world without debt.

      • Dave permalink

        Agreed. Money is debt; not just “almost all,” but all. It is a representation of what we can exchange it for in real goods and services. It’s value fluctuates based upon it’s level of scarcity and the availability and scarcity of what you want to exchange it for. I would think its value would also fluctuate based on the trustworthiness of the issuer; I could see a situation where a small country issued a very small amount of currency (scarce), but was under constant threat of take-over by a larger neighboring country. In that case, it may not hold as much value or may be nearly worthless in foreign exchange.

        And back to the social security thing, I’m definitely not up on the workings of the system. Yes, it’s a tax that initially destroys the money, but then either 1. a similar amount is paid out to someone currently receiving benefits or 2. It is actually set aside and saved in Treasuries by the SS trust fund, i.e forced savings with a guarantee of future payments. Either way I am aware there is no actual limitation in the state’s ability to continue to make payments.

  7. Hey Dave,

    Unfortunately it’s not the world I live in either. You need to support your family and I did as well. I was in the banking business and the basis of my retirement is rentier income. Ouch! I have no basis at all to criticize anyone trying to make a living and I’m sorry if it came across that way.

    Any system which leaves a few living like nobles and very many struggling is, IMO, deeply immoral. It’s troubling for a philosophical socialist to live on rentier income. But, of course, any worker on a pension is also living that way.

    Hayek’s philosophy is deeply anti-democratic – its sole value is little more than property which it equates with freedom. I think it’s the very antithesis of morality and an assault against humanity itself. Has the institution of private property resulted in advanced technology? Sure. And most of it was created (by the workers themselves) to reduce labor input. It’s like my most recent post on Summers. Capitalism’s great if you look at it from just one side – we can produce a lot of goods with very little work. But it’s the other side which is the problem – how do you assure people have enough purchasing power? All the tech is privately “owned” and if you’re not one of the owners, you’ve got a tough world ahead of you. This has been a deep sickness of capitalism since the English enclosures over 200 years ago and it’s been a consistent theme of political struggle ever since. It’s bound to get even worse as I feel certain we’re heading into a future of geometrically advancing tech. Without socialism or some real progressive social democracy, that’s bound to lead to geometrically receding purchasing power. What a world capitalism is taking us into!

    I’m confused about your last question. One of the bedrock principles of Keynes and functional finance / MMT is that you don’t need savings in order to invest. Investment itself creates the savings. We have plenty enough technology for everyone to live quite nicely and with a great deal of leisure; I see no purpose for the rentier and neither did Keynes.

  8. Dave permalink

    Jim, I get the point that investment creates savings, although I don’t think it’s true in all cases. For example, I could get some credit card credit without savings, and possibly a small business advance without savings (although it may require at least some level of deposits) but for larger investments, such as a house or apartment building, banks certainly require some level of savings (equity, deposits) so I don’t think its an entirely true statement. But that wasn’t my point.

    The question was, given your statement 1. We should euthanize the rentiers; and 2. Andrew’s statement: “In order for people to live off of their savings, they have to earn enough during their working life. There’s nothing wrong with that as such, but many people don’t earn enough these days for this to happen.” So, if you provide enough income during their working years for people to save enough for retirement, that necessarily means one of three things: either 1. They are using their savings to generate interest income and live off that income, i.e they are rentiers , or 2. they have saved enough to keep the savings in a mattress with no income and gradually spend that savings down as they age, hoping that the savings outlast them , or 3. eliminate the savings altogether in their working years and simply give them guaranteed income when they have reached a certain age.

    I’m thinking you are a proponent of the 3rd option (or possibly a 4th that I’m not seeing), but was trying to clarify.

  9. Dave permalink

    One more thing (apparently I have some extra time on my hands today). “Capitalism’s great (I’m going to quote you on that sometime!) if you look at it on just one side-we can produce a lot of goods with very little work-but it is the other side which is a problem: How do you ensure people have enough purchasing power?” This is exactly what I’m seeking answers to, and a reason I’m attracted to the original MMT which includes the JG. I do believe in preserving (and getting back to) true competition in pricing. I don’t believe in the statist model where G controls all pricing. I prefer the market for most of that. You are fond of saying that the top 500 companies receive 40% of global revenues. I wonder what that percentage was 30-40 years ago? Anyway, I would say the answer is three-fold: one, increased share of national income to wages, two, reduced costs of basic necessities including energy thru increasing the productivity level of each unit of energy input (Hawken’s & Lovins Natural Capitalism) and, three, an increased level of net financial assets (equity) to the level of leverage. I am sure that’s not an exhaustive list and any other suggestions I am open to hearing.

    • Andrew permalink

      I don’t believe that something like government control of prices or what we produce stands a great chance of good results. I have said here before, but I’ll offer again my short list:

      - Shorten the work week to spread work among people
      - Provide a SS-type stipend to all citizens
      - Pay a highly progressive tax based on inflation/unemployment
      - Strengthen estate taxes
      - Guarantee health care and education through college

      The MMT job guarantee was initially attractive to me as well, but frankly I would rather people for themselves what counts as “productive” work. Work can be fulfilling, but so can leisure. The idea that we have to work in order to consume, rather than produce, seems rather out of touch — especially as we do become more efficient at producing our basic needs.

  10. Any proposal must be fairly radical to have a chance of successfully addressing the radical problems facing average workers.

    Dave or Andrew, neither of you favor a major role for government in price setting. Probably both of you accept though a direct government role in regulating the pricing of our utilities under the theory that monopoly power should be regulated. I see no difference for oligopolies as they have the same basic pricing power. I think direct public oversight of the huge conglomerates is fully warranted and would provide huge dividends given the extent of global production they control. Today they’re “owned” but not controlled by absentee rentiers who provide nothing of real value. Such power can’t, IMO, be the basis for any future just society. I say treat the monoliths like the utilities they really are and make sure they start operating for the public good. I think it’s clear that an advanced high tech automated society can’t have its technology owned by just a few people. It would be little more than a slave society that would collapse in on itself eventually anyway.

    Dave, you say you want increased national income going to wages but how can you do that without controlling pricing? Unions were strong back in the 70′s and got pay raises but the companies just turned around and raised prices. Why would that not happen again? I think reducing the cost of basic necessities makes sense but I’m not sure how you propose to go about it. I’m not sure where you’re going with the net financial asset idea.

    Andrew’s list seems like a decent start. I can’t outline a detailed list here but I’ve thrown out a number of thoughts on the blog. I think power inequality is one of the key things needing correction. I see no economic or moral basis for it. My ideal end point is democratic socialism where everyone lives equally and our advanced technology is used for the benefit of all. To get there, the idea of elite control over production and money has to be addressed and I think going 1st after the mega corps plus pushing the envelope on the freedom fiat money provides are good places to start. Of course there’s many other areas needing to be addressed, not least of which per today’s post is military adventurism – a huge cost and risk to the world.

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