I read an interesting article in the Financial Times recently,
Powerful interests are trying to control the market, John Kay, which
describes the problem of rent
seeking, and inspired me to write this piece. In the same vane is
another Financial Times article,
Only competition can safeguard free markets, Lord Saatchi.
Another article referenced is
A Critique of the
Austrian School of Economics: Monopolies.
Rent-seeking takes many forms. On Europe’s oldest highway, the Rhine river, powerful land owners once extracted tolls from passing traffic. In Zimbabwe today corrupt government officials extract efficiency crippling tolls which contribute to the impoverishment of their country. Many other examples of rent seeking are more subtle. The phenomenon was first formally described in connection with monopolies by Gordon Tullock's 1967 paper "The Welfare Costs of Tariffs, Monopolies, and Theft". Rent seeking damages economic growth in a number of ways: for example, by the diversion of effort and talent from proper valued added economic activity to the collection of rent; also, as we will see, by damaging the competition between market participants which is so vital to innovation. In this article we also show how concentration of economic power tends to become self reinforcing and allows rent seeking, and how regulation of rent seeking is therefore required to keep markets competitive.
In 1981 the market for personal computers was highly fragmented with dozens of manufactures competing in both in the home and business markets. The IBM PC was released at this time and it proved a huge hit with business. "You can't get fired for buying an IBM" said many. Unable to assess the technical superiority of competing computers directly, customers put their faith in the famous IBM brand. Within the concept of brand value, an economically undesirable component that comes out of a lack of transparency and irrational purchasing decisions can develop, and this component is a form of rent. With a very powerful brand, for example, you can release a product which has identical utility to that of your main competitor, but which is more expensive, and still capture the largest market share. Some customers will not pay for a premium product, so you leverage your economies of scale by selling the same product in a cheaper unbranded format to pick up the bottom end of the market as well. A huge company such as Nestlé, for example, may have several near identical products competing under a variety of names and brands. Your marketing then focuses on creating consumer expectations which maximizes your top end sales. If you are selling batteries you never advertise how many ampere hours your product actually lasts for, you want your customers to put their faith in your brand, you avoid giving them the capability of making a rational choice. Economists talk about efficient markets, but information asymmetry and behavioural psychology subvert the theory, allowing suppliers to manipulate their customers. If the government tries to intervene in the market, for example by increasing transparency, you employ lobbyists to argue the libertarian case. A competitive market is your enemy, you do everything you can to subvert it, to monopolise it, to seek rent.
Concentration of economic power tends to become self reinforcing: because of economies of scale; because of the power of irrational brand value; and because of the build-up of resources which can be used to stifle competition, for example by pricing competitors out of the market and later raising prices. This problem was widely recognised in America’s gilded age. The well-founded fear was that the new mega-rich – the Rockefellers, Carnegies, Vanderbilts – would use their wealth to grow their economic power, subverting the market. Today it is Russia that exemplifies this problem. In 1902 Teddy Roosevelt's great "trust-busting" campaign began to reverse the tide of monopoly formation in the US. In the 1920s, however, the reforms unravelled, and by 1929 only 200 corporations controlled over half of all American industry. The New Deal era ushered in another era of antitrust policy, again reducing the percentage of monopolies. However, since the Regan years antitrust enforcement has dramatically declined and there has been a massive increase in consolidation. Consider US corporate earnings over the last several years. They have been regularly exceeding the rate of US GDP growth - a paradox Warren Buffet famously comment on. A transformation is taking place in modern society, competition is shrinking and rents rising, therefore corporate profits are accelerating. We are witnessing a vast transfer of wealth from the average man to the shareholder, and much of it is borrowed money. We also have a rise in rent seeking in the banking industry with consequent outsize earnings. Wal-Mart is a classic example of unstoppable economies of scale, which should bring widespread economic gains, but which delivers much less than it could because Wal-Mart retains many of the economy of scale benefits.
We have Lord Saatchi's point: After 100 years of competition, the record seems to show that Marx was right – the end result of competition is the end of competition. Marx foresaw constant internecine warfare among capitalists, resulting in fewer and fewer controlling vaster and vaster empires.
Lenin described capitalism degenerating as follows: Free competition is the basic feature of capitalism, and of commodity production generally; monopoly is the exact opposite of free competition, but we have seen competition being transformed into monopoly before our eyes, creating large-scale industry and forcing out small industry, replacing large-scale by still larger-scale industry, and carrying concentration of production and capital to the point where out of it has grown and is growing monopoly.
In the UK today we clearly see this process at work on the High Street, where the number of independent retailers is continuously shrinking and retail chains are increasingly dominating the landscape. Some believed that the internet might reverse that tide, but the rise of Amazon and eBay has dramatically proven otherwise.
Although the IBM brand started the ball rolling, in this particular case the attraction of open standards became a far more important factor. Failing to realise the importance of the operating system, IBM purchased one from Microsoft. As a result other manufacturers were then able to copy the IBM hardware design and ship their 'Clones' with a perfectly compatible operating system purchased directly from Microsoft (in order to produce their own non-infringing functional copies they reverse engineered the IBM BIOS, but reversing engineering the OS would have been too difficult). As a result, even without IBM's approval or participation, their PC became an open standard with virtually unstoppable economies of scale. IBM soon lost control of of the market to clone manufacturers, and later also lost control of the definition of the open standard. However, Microsoft's key role as the operating system supplier to the IBM compatible market gave it a hugely powerful monopoly which it later extended into word-processing, spreadsheets etc. US regulators consequently debated intervening in the market to split Microsoft, as had happened to AT&T in the 1970s. The company, however, eventually escaped intact after making numerous concessions; for example improved interoperability with competing software.
Microsoft's dominance clearly allows it to seek rent. For example, Microsoft can, to some extent, set prices for its products simply by maximizing its revenue - whereas in a competitive market prices converge toward the costs of production. The debate in Microsoft's case is to what extend this rent damages the workings of the free market and the economy as a whole. Does Microsoft reinvest the rent raised in the production of economically useful value added innovation? If not it is sucking valuable capital out of the economy, impoverishing the dynamic whole to feed the lazy one. Can we still count on Microsoft continually improving a product which is subject to little competitive pressure? Can we rely on Microsoft not stagnating intellectually, for without competition only its ideas are realised? Will Microsoft use its monopoly power to increase its revenue by manipulating its customer base into wasteful or even damaging activity? For example, forcing customers to spend money upgrading to the frivolous and unproductive Office 2007. Another example of this concept is the food company which encourages its customer to buy and consume unhealthy, but addictive, junk food. This is the most terrifying argument: the idea that rent seeking ends up in intellectual decline, as companies become more powerful they squeeze all idealism out of the market creating a world of overpriced mindless junk.
How can government intervene to curtail rent seeking? Here are some examples:
(1) In the EU Class A Bananas must conform to a certain size and shape. Similarly in the UK all personal loans must advertise a standardised measure of cost called the "APR" - Annualised Percentage Rate. Car manufacturers have to prove their designs conform to certain safety standards. This type of intervention is useful because standards are the lifeblood of competitive markets. Open standards are part of this concept - European governments were right to target Apple's proprietary iTunes format.
(2) Many consumers bought the IBM PC because they did not have the skill to make a technical choice, and instead put their faith in the IBM brand, earning IBM rent. To reduce this tendency regulators need to concentrate on educating the consumer. For example, regulators subject consumer products to a battery of tests but the data rarely sees the light of day - they should take a much more proactive stance in publishing pertinent data on the effectiveness of products allowing the consumer to make rational choices. Pursuing vendors for misleading claims, eg in the cosmetics and heath food industry, is not enough. I want to know if there really is any difference between Colgate Total and Wal-Mart's own brand toothpaste. I want the world to know how bad the sound quality of an iPod really is, because then Apple will be motivated to divert some of their gigantic profits toward fixing it. Today this review function falls to private sector third parties, such as consumer magazines, but these third parties are far to close to the manufactures and therefore corruptible (in most cases their main form of income is advertising from the very manufacturers whose products they review).
(3) Consumers are easily duped by small print, regulators need to maximize price transparency by purging contractual complexity. Cross subsidising, for example, endangers transparency and regulators should strive to eradicate it. The foreign exchange fees many companies charge, eg Visa and MasterCard, are at best cross subsidising, at worst profiteering. Contracts with notice periods not only damage transparency, they criminalise the unfortunate, costs should ideally be front loaded. Hire purchase is an obvious example of where this can not happen, yet it is also an example of a shady area that too often delivers low added value to consumers. If someone wants to borrow money to buy a car, far better they go to a bank, a separate specialist competitive market, not take a loan from the dealer.
(4) Duracell and Energiser between them dominate the battery market and sell mostly disposables. Suppose we outlawed the sale of disposables and forced consumers to take rechargeables (which in fact can be made to last just as long). Consumers would gain, as would the environment. What we are saying here is that consumers are irrational for various reasons which include the power of brands and advertising to manipulate their purchasing decisions. This irrationality creates, in a sense, an opportunity for battery manufactures to earn rent.
(*) What do these examples have in common? Milton Freedman imagined laissez-faire as a world of untrammelled creative-destructive, innovation and efficiency gains, but capitalist vested interests also work to prevent these forces at the customer level. That's because the powerful incumbents don't really want to struggle for survival in a world of creative-destruction and innovative efficiency, they want sit back and rake in profits keeping their customers using proprietary expensive technology. Milton Freedman wasn't thinking about the balance of power between incumbents and new entrants, as soon as that balance swings toward incumbents capitalism becomes anti-innovative and bloated. Freedman's inability to comprehend the tradeoffs involved in the duality of becoming that exists at the heart of all economic and political policy prescriptions is the classic mistake of the Cyclopes like right wing ideologue.
Using these examples we can consider how one might go about regulating the Mobile Phone market. For historical reasons we have, in the UK, four major companies competing in the market and each one owns its own infrastructure. As a result we sometimes see four network masts on the same building, yet this setup is deeply inefficient and environmentally harmful. Instead, the government should own the infrastructure and maintain it by inviting bids from private sector companies. Will prices increase if a single company maintains the network infrastructure? No, because we invite bids thus subjecting the provider to competitive pressure, also we maximize economies of scale. Will the network infrastructure quality suffer if consumers have no purchasing power over it? No, because consumers are not network experts, quality is better enforced by a regulator with scientific and engineering expertise.
The network provider should not sell/bundle telephone calls, just network connectivity. Consumers would purchase telephone calls in a stand alone VOIP market, and because competing within this VOIP market would be easy, prices would be driven to the lowest possible level. In addition, the network contract provider must not be allowed to include a phone in the contract, prices will shrink if consumers are forced to buy their phones in a maximally competitive stand alone market. Neither should carriers be allowed to lock consumers into yearly network connection contracts, contractual complexity must be ruthlessly minimised in order to expose suppliers to maximum price transparency and therefore maximum purchasing pressure.
These radical changes would create a viciously competitive market which would drive prices to the lowest possible level and render the maximum level of economic efficiency. Mobile Phone companies would be horrified, it would decimate both their margins and their brand value. This this destruction of brand value also destroys the advertising market, because in a highly competitive transparent market brand name becomes irrelevant. The advertising market, which is primarily the market for Brand Value, is not only an economic inefficiency, many argue it also has a deleterious impact on consumer ethics.
Vigorous control of rent-seeking is the difference between a competitive market economy and a laisser-faire regime, and it is a vast difference.
Applying these principles across the board would totally transform our economic model, our standard of living, and perhaps even our ethical outlook. This is what Tony Blair's redistributive laisser-faire lacked, this is the golden key capable of redistributing efficiently, the key which which avoids easily evaded and inefficient levels of personal and corporate taxation rates.
The plot thickens: If
concentration of economic power has a hugely beneficial impact on
productivity as a result of economies of scale, we can not sacrifice it
for the sake of a competitive market economy. So monopolies in boring
economy of scale consumer products such as toothbrushes or batteries, or ultra high-tech
high-risk products such as aeroplane or nuclear power plant manufacture,
may be as inevitable and desirable as monopolies in public utilities
such as water companies and phone companies. If this is the case competitive pressures
in these cases can never
elevate consumer interests above producer interests, and we logically we reach beyond the private
toward the idea of 'vastly efficient economy of scale' and 'vastly advanced high
tech' state capitalism - because the state
alone works in the peoples interest, and therefore it alone can be
allowed to take a superior position.
Think about Hitler or Stalin during the 1930s, the incredible strength of these countries derived from their state led economic models. What really killed the state interventionist Post-Keynesian Consensus in the 1970s Anglo-Saxon world was the incompetence of Anglo-Saxon democracy post the 1960s embrace of politically correct egalitarian populism, a philosophy which has its epicentre in the UK and USA. By the 1970s that populism was crippling the economy because the many state owned enterprises which dominated the economy were unable to implement labour market reforms and close down outdate industries such as coal mining. In effect left wing politicians and trade unionises had killed the goose that laid the golden egg with their cowardliness and anarchism, driving a swing to the right. But instead of banning strikes and cutting wages and making the government bureaucracy more rational and business like, Thatcher and Regan solved the problem by getting the government out the business of running the economy. By depoliticising the economy the balance of power swung away from cowardly left wing politicians beholden to worker vested interests allowing the emergence of new life. But this unphilosophical course of political action lacked vision and depth: understand that by taking power away from the political journalist class instead of waiting for them to self-improve it drastically intensified their mindlessness leading to the era of smoke and mirror sophists such as Tony Blair; also the transfer of power to individual entities created the build up of slavishly right wing vested interested and unthinking wanton economic activity. Likewise the economic power of the Soviet Union was emasculated by erratic Khrushchev who reacted to Stalin's violence by rejecting cold hard policymaking and embracing wooden left wing ideology. Lee Kwan Kew, on the other hand, wasn't immune to the Thatcherite mistake as his unwise decision to sell instead of rent government housing probably shows, but he is a good example of someone who didn't fall into the privatization trap, and simply outlawed trade unions, allowing Singapore to thrive under a much more State Owned Enterprise like model.
So think about the failure of State Owned Enterprise in Western countries during the 1970s as not the end of the game, but rather just an example of what happens when politicians can't force through economic reforms or run business competently. The philosophical problem that everyone talked about in the 1930s is that whilst State Owned Enterprise has vast power in the hands of a great dictator, it becomes a dead weight that drags a country underwater in a weak incompetent democracy. Today we talk about the idea that American politicians are so incompetent that the S&P500 rallies when the House and the Senate and the President are split, because the less the politicians can do the better. This kind of incompetence turns state owned enterprise into a quagmire, but if you can find a wise King then state owned enterprise can flourish as it does in Singapore and China. But today the era of incompetent democratic politics is drawing to a close anyway, because as time goes by and the problems in the US economy cause by political drift have mounted, and are gradually becoming totally unsustainable.
The article SOEs in China today – Not your Grandfather’s State Owned Enterprises any more talks about the history of Chinese State Capitalism. It runs approximately as follows:
Those who have been doing business in China for awhile are quite familiar with the differences between the State-Owned Enterprises (SOEs) and the Privately-Owned Enterprises (POEs). For those of you not familiar with this distinction, let me break it down for you. The POEs are just that, companies owned privately with little or no government involvement – traditionally they are perceived to be run by business-savvy executives with global business experience. The SOEs, by contrast, are traditionally perceived as hulking, unprofitable behemoths chocked full of aging assets and run by 55 year old Party hacks in moth-eaten Mao suits and greasy comb-overs.
After Liberation in 1949, the Chinese Communist Party brought all businesses under their control and POEs were, for all intents and purposes, completely eliminated in China (as was nearly all foreign investment when they were unceremoniously kicked out of China). Through a series of disastrous events in the 50s through the 70s (the Great Leap Forward, the Cultural Revolution, etc.), the government proved that, not unlike their Soviet cousins, they were terrible CEOs – factories were inefficient, poorly run and churned out bad-quality junk that had no relationship to any market demands whatsoever.
One of the many reforms that the Deng Xiao-ping administration started in the early 80s was captured under the Party phrase “POEs will advance; SOEs will retreat.” What this meant, in effect, was that the Party wanted to get out of the business of being in business and started the long, mind-numbing, ulcer-inducing process of unwinding the complicated SOE culture … which included, for many people, guaranteed housing, education and healthcare.
Fast forward to the mid-2000s and you begin to see private Chinese companies really moving the market. Thanks to China’s joining the WTO in the early part of this century, various sectors in the China market were opened to foreign investment, particularly retail and distribution/logistics. This led to further (and more rapid) modernization of China’s business environment and it looked as if the SOEs were going to go the way of the dinosaur, only to be studied by business anthropologists who dug up their jerry-rigged balance sheets and padded expense accounts.
Fast forward to today and we are seeing a surge in SOE. Eg in automotive, the so-called “Big Four” (First Auto Works, Shanghai Automotive, Dongfeng and Changan) are on a consolidation tear, encouraged by the government to acquire smaller, regional automotive companies, much like GM, Chrysler and Ford did in the early days of the U.S. auto industry. The Chinese oil, gas and mining giants are actively looking outside of China for investment and expanding their global footprint. Several of the larger SOE construction equipment companies are aggressively expanding, both inside and outside of China. In 2009 state owned airlines have taken advantage of the credit crisis to gobble up essentially all remaining privately owned airlines...
All of this has led to speculation that the Chinese government is trying to reverse their dictum of the 80s and say, rather, “SOEs will advance and POEs will retreat.” The SOEs are no longer run by Party hacks … their CEOs are often Western-business educated and understand very well both international commerce and the unique requirements of doing business in China. They are dressed in Armani suits, have their hair styled and show up at the right parties...
More and more we see Chinese companies – and particularly SOEs – coming to the forefront of Western Business worries. For example, we have just watched Shell being squeezed out of oil refining in China by the low returns on capital its SOE competitors are prepared to run. These guys are no longer the lazy competitors we once knew, they are well run, government backed, in it for the long term, and prepared to run much smaller profits. So they are a big threat to our economic model, whether you know it or not.
Now that we've heard the moving story, let's talk about
China's embrace of State Capitalism in a more scientific way. We can point
to the following factors:
(1) Economy of scale. Massive centrally planned localised infrastructure investments have leveraged the type of economy of scale economics which Paul Krugman won a Nobel Prize describing. In China there are cities that specialize in steel manufacture, other in solar panels, others in paper towels, others in plastic toys, there are even entire towns devoted to the manufacture of hand painted reproductions of famous artworks. As China continued to push this economy of scale model forward it naturally embraced state capitalism because the goal is to consolidate everything into the ultimately powerful seamless whole. (Note 1: the major un-sustainability of China's economy today is caused by a perfectly opposite philosophical counter current. Blinded by the pursuit of GDP and neo-liberal theories of economic development, and deaf to all sense of beauteous lifestyle, Chinese local government officials diversified away from the rational seamless machine model into commercial parks and tourism and residential housing, upending the communal economy of scale concept and wallowing in chaotic and wasteful activity in the most spectacularly ruinous way.) (Note 2: the once noble Paul Krugman crashed out of intellectual ascendancy because he didn't have the courage to follow up on his economy of scale model, which is a great challenge not not only to the wishy washy hand waving relativism of the modern liberal which hates to be pinned down because it doesn't want to admit its inadequacy; also the cowardace of the modern liberal which is created by a sort of internal revolt as those without philosophical skill think of themselves as experts in justice even though they can't grasp the totality of the economy, creating the blind Bertrand Russell type illness which panders pacifistically to worker vested interests. What we are talking about is the disease of the Western elite which is the opposite of the disease we talked about a moment ago in the Chinese elite. So lets sing a beautiful prayer in the hope it brings Krugman back from the abyss! Nobody wise holds grudges against men like Krugman because it's ignorance not wickedness that is holding him back, and one can only pity the terrible inner pain it must be causing him.)
(2) Inequality. By capturing corporate profits in State Owned Enterprise society as a whole is enriched rather than a handful of lucky shareholders and chief executives, or fat margins are simply eradicated and prices shrink. The first cuts taxes, the second cuts consumer prices. For example, China has the some of the world's leading banks, but because they are state owned even their most high flying of executives are paid a pittance compared to Western banks. For example, whereas corporate profits as a proportion of GDP continue to rise inexorably in the USA even in the midst of recession, in China the tide is beginning to change. This is one of the reasons Chinese stocks are falling, but it's also one of the reasons Chinese companies are expanding across the world, namely because they are happy with low single digit returns on capital and therefore offer much lower prices that Western competitors. For example, think carefully about this statistic: China produced 560 million watches in 2009, Switzerland produced 22 million, yet the Swiss industry’s revenue was almost five times higher. To save you the math, Swiss manufactures such as Swatch sell their watches for an average of 127 times as much as the many nameless Chinese producers commissioned by companies around the world to produce their own-brand watches. And we are saying the extraordinarily slim profit margins such Chinese producers run are not just a result of creating watch cities and other economies of scale devices we talked about in the first point above, but also the result of state owned enterprises who charge a small return but never profiteer with household name Western style profit margins, and this in turn compacts margins at all the private sector companies in China too.
(3) Stability. Think again about the Chinese vs Swiss watch example from the preceding point. High profit margins can become a trap - a bubble - a performance enhancing drug that bulks up and then implodes. Imagine yourself as an expensive Swiss Watch maker in a word undergoing a sort of new Industrial Revolution driven by China. First thing you notice is a kind of a kind of benevolent low inflation environment in which the price of imported technology and metal falls, so your profits go up. Then the nouveau riche in China start buying your expensive watches and you are on a roll. But the Chinese slowly catch up in the same way that Japanese motorbikes once caught up the British bike maker Triumph, and one day the world figures out that your upmarket brand is all skin deep over-pimped marketing and your products are not really worth the premium price. Suddenly your sales start falling but the global economy is still sizzling and inflation is picking up and your life becomes a nightmare of stagflation. In the 1970s the terrible economic decline was created by a combination of world inflation combined with inefficient manufacturing brought about by ossified labour market and incompetent central planning, today the West's problem is bloated profit margins and socially useless pimped up brands.
(4) Technological progress. Aircraft maker Airbus may not be as profitable for its shareholders as the sporting goods company Nike, but Airbus is a vastly more valuable national asset. SOE allows government to direct the economy away from the fluffy easy money in consumer brands, real estate and banking. Today we realise this kind of economic planning is absolutely critical - contrast how China has moved rapidly up the value chain into high tech business such as high speed rail, whilst many other emerging market countries are basically nothing more than giant soup kitchens which let Western companies dig up their mineral resources in return for cash which they in turn dole out to their masses. Even in the high tech West statesmen are now beginning to realise the importance of nurturing hi tech and manufacturing exporters. Think how laissez-faired pumped up and then abandoned British Banking and Spanish Real Estate like the Californian Gold Rush.
(5) Environmental progress. Enforcing environmental standards on small private companies with regulation and taxes proved almost impossible, so instead China has encouraged consolidation of production into a handful of massive SOEs which share its environmental vision. Over and over again the Chinese have found that fragmentation lowers standards. For example, the death toll at small Chinese coal mines was appalling because all the cowboy bossed cared about was making money and you can't really make men more loving or more professional by sending in a team of lawyers because the lawyer's don't know anything about the industry and just end up tying everyone up in red tape. Instead you squeeze out all the little guys consolidating the industry into a handful of highly professional companies dedicated to higher values.
(6) Cultural progress. In China investors have badly burnt by misreporting, babies have been poisoned with toxic milk, and roads have collapsed though shoddy building. The Chinese private sector is like many emerging market private sectors, it's essentially a wild west like zone full of dishonesty, disrespect, and unprofessionalism. Think about the famously professional Germans, how did that idealistic culture come about? It was created by the professional guilds that started up back in the Age of Enlightenment, not by law suits against bad practices. Today the Chinese equivalent of the old European professional guild is state owned enterprise. Perhaps the new dictum should run: "SOE builds integrity, camaraderie, and expertise; POE builds dilettantes, cowboys, and wheeler dealers". In the 1970s state owned enterprises lost interest in their customers and only cared about employees, today we have swung the other way around, private sector companies have lost interest in customers and only care about shareholders. Socrates said the target is "wisdom", in the 1970s companies were aiming at employees, today companies are aiming at profits, and the mistake of the unenlightened man is to think that these superficial targets must lead up the mountain, but they do not because the link between wealth and wisdom is not monotonically increasing (as explained at length in point three above).
Today Joseph Stiglitz, whose work on information asymmetries won the Noble Prize, has begun advocating state owned enterprise in the West as a way to leverage the ultra cheap financing available to the US government, and to promote investment at a time when private sector counterparties are scaling back. This idea has become known as the New European Marshall Plan.
In order to understand the idea of a new New European Marshall Plan we must bear in mind the following points:
(1) These state investments must generate minimal positive returns, they can't be subject to democratic capture creating loss making vanity projects (eg UK high speed rail), or loss making hot air projects (eg UK wind farms), they need to be managed in a hard headed non democratic way.
(2) They can't get caught in existing public sector labour markets and unions etc, they must sit apart in a special blue sky structure or they will end up in 1970s style Post Office style incompetence. Think of the way Lee Kwan Yew enabled the assent of Singaporean state owned enterprise by banning strikes. Western liberal democracy is weaker than Singaporean one party rule, but an easy policy to enact in a country like for example Greece, would be a EU state owned enterprise project that invests a lot of money in the country with the promise of a low return on investment and excess profits reinvested, and which employs a lot of Greeks, but which secures in return total exemption from all Greek laws including the right to strike. Even the notoriously self-centred modern Greeks would be far too ashamed to say no to a project like this which brings both benevolent investment and jobs.
(3) These projects shouldn't be afraid to compete with the private sector, stepping on private sector toes is likely to be inevitable if the projects are to have real world value, besides destroying private sector monopolies is the proper way to return excess shareholder returns to the public. Let's take Greece as an example again, you can deliver huge stand of living increases to masses simply by cutting prices. For example, you can create a state supermarket with much lower profit margins that private sector counterparties and monopolise the market. You could move more rapidly by nationalising competitors or simply removing their right to compete, but it would be important to think about the long terms implications and individual ethics of such an aggressive move.
(4) Ideally they should avoid a lot of outsourcing which allows the incubation of in house talent and a new idealistic workplace culture. In other words, ideally one wants to build a smart government whole so that we don't have smart supermarkets but incompetent teachers, everyone is together and leans from one another. However, if speed is more important, so utilizing a more crony capitalist rather than state capitalism culture, the projects should ideally be designed in such as way that the capitalist incumbent has no power over product deign or marketing, but is simply a provider. Perhaps the root of all the problems in the modern world is the tangling up of sales and production and accounting, because it's in this darkness that all the evils of rent seeking emerge, such as mindless products, and worthless products, and excessive corporate profits. If we trying to design an economic model to make the Kings of Philosophy such a Plato and the Gods In Heaven such as Hephaestus proud, we would surely seek to prise these things apart so goods are designed for the best men not the masses, so quality is judged by scientists not consumers, and so that in all large corporations profitability is totally transparent and corporate profit margins and executive pay are regulated.
(*) The political problem with such investment is that it takes on both the unions and the private sector at once, it is antithetical to the vested interests on the left and right who control today's political parties by patronage and tradition. For example, many EU politicians are in the pockets of trade unionists who tell the workers who to vote for and finance political parties. For example, many EU politicians are in the pockets of big businesses employing lobbyists and dishing out lavish entertainment.
(*) The bureaucratic problem with such investments is that in the EU today governments are all but banned to undertake investment that might compete with the private sector. The problem is not political funding because the EU has both great willingness and some budget for public investment in areas including infrastructure, R&D etc. The problem is that bureaucratic EU rules and regulations forbid projects on anti-competition grounds and constantly stop short of real results in order to "let the market take over". As Jesus said moral laws are slavish, you have to go behind the surface and seek the essence of what makes men good, ie contemplate things such as love not just rely on rules saying men must shake hands etc. As Plato in the Statesman dialogue, all these people who think they can write down a lot of rules that describe what statesman can or can not do are ideologues, the science of government is too complicated to express in simple written laws, laws are what schoolteachers create to keep the community stable, but they can never be perfect and they need judges who understand what justice, beauty and good really is to supervise their administration.
If the EU Marshall Plan ever takes off what kind of policies might it pursue? In order to think about this question imagine yourself as an entrepreneur who has the politicians and the central bankers in your pocket. In other words, you have infinite political muscle and infinite credit. Where do you think the easy money is? Here are two examples:
(1) Housing & Political Muscle. Think of Paris compared to Los Angles. What Napoleon III had which the modern businessman doesn't have is political muscle. Think about the real estate market, a cheap out of character house in Saint John's Wood will sell for a vast amount of money. An expensive beautiful house in Stanford will still sell for peanuts. Do you see that capitalism relies on individual incentive aligning itself with communal good, but in real estate the dynamics point in precisely the opposite direction - self interest encourages ugliness in Saint John's Wood and prevents beauty in Stanford? That is why Western capitalism has destroyed it's cities, why no really great new cities have been built in post-modern times. The only way to overcome this inefficiency is to work at the communal level, not piece meal developments but rather entire cities such as the statesman of old used to build. The problem is that NIMBYism gets in the way, but if the world is run by competent politicians who can sell large projects to their electorate huge projects become possible. For example, imagine the UK government using compulsory purchase orders to buy agricultural land at agricultural prices, and using compulsory purchase orders to buy ex-council estates at ex-council estate prices, then using modern materials combined with neo-classical architecture and ambitious central planning to create valuable new cities as beautiful as Chelsea. Such investments will (a) make an enormous profit, (b) stimulate the economy, (c) solve the housing crisis, (d) help mend the bankrupt culture because squalor is the number one cause of social alienation.
(2) Nuclear & Financing Muscle. The first four European Pressurised Reactors currently being built in France and Finland are well behind schedule and budget. That's because the EPR is a new reactor design which has more sophisticated safety features and burns fuel slightly more efficiently, and new designs take time to bed down and become cost effective. As a result the Nuclear Industry is trapped in a sort of chicken and egg paradox, nobody wants to get started because the business isn't profitable unless you are building in serious numbers and the private sector don't have either the capital or risk appetite for massive scale. As a result the nuclear industry today is increasingly dominated by China, yet the West are technologically still well ahead. In other words the Chinese are leaving the West behind in the Nuclear Industry not because they have better scientists, but simply because they have politicians with bigger vision and bigger balls. We said "imagine yourself as an entrepreneur who has the politicians and the central bankers in your pocket", if you could achieve those things you leverage the superior technological advancement of the West combined with the the unlimited world appetite for Western government debt to launch a massive building program and rule the world Nuclear Industry. Under laissez-faire capitalism this will never happen, and the Chinese will inevitably end up ruling the world of Nuclear and many other things. This is why Agamemnon was prepared to sacrifice his daughter to get the fleet sailing, if the West do not wake up soon they will be left so far behind they might end up slaves.
What else is left in the world of post-paradigm economics? Dyson said he build a machine to vacuum the floor and wash the floor, but no one was interested. When he stripped out the washing feature it became a hit. In the same way too many ideas can leave people spinning. But this banquet deserves a dessert...
Do you know what the difference between Tesco's Toothpaste and Colgate's toothpaste is? Can you tell them apart in a blind tasting? Do you know which is better for your health? Do you even know what the basic ingredients of toothpaste are? No? Then how can you possibly call yourself a rational agent maximizing utility? All those toothpaste brands are a waste of time that enrich at the people expense, we could set up one factory in Greece that made all the toothpaste in Europe and save a fortune. We can give people twice the quality of life at half the price by cutting away the rubbish that serves no function and just contributes to economic and environmental waste. That's what the new paradigm is all about, thinking out of the box about how to make people's lives better. Let's hope that this time around we don't need a war to make us realise how silly we are, because if you really think about it carefully that was the purpose of the Second World War, to get rid of the muddle headed politicians and bring societies together with progress and passion for communal advancement. Think about those state owned factories making tanks and submarines and men giving their life for their country and women working round the clock. What do you think God wants for humanity? To become smart and do glorious things. To evolve.