The Failure of State Sponsored Capitalism

It is my assertion that over the last few decades since the fall of communism a lack of understanding of how markets actually work has become commonplace around the world. When it was capitalism vs. communism (or socialism, or even fascism), you generally knew where you stood. To wit:

  • Capitalism said that the free market would provide the best outcome for society, while communism / socialism felt that capitalism had to be tempered and / or that key assets should be owned by the state 
  • Capitalism said that government should be small, and stick to a few areas of logical focus such as security and foreign affairs, while socialism / communism celebrated government and government jobs as a way to employ the citizenry and achieve social goals

Subtly, the growing attraction of jobs that were primarily in the government sector (environmental jobs, education jobs, health care jobs, and outright government work) and the basic thought that you could build a nice, steady career there with assured benefits and pensions while “doing right for the world” became commonplace. These jobs were often seen as “nicer” and “better” than the ruthless corporate jobs that are continually vilified or parodied on television (such as “The Office” or virtually any thriller set in business).

On a parallel scale, the idea that “State Owned Enterprises” (SOE) could be a significant part of the world economy, and compete effectively with private sector companies, became widespread. Let’s leave aside the companies that fell into the US governments’ hands during 2008-9 like the banks and car companies; I am focusing on the world wide companies, often country “champions”, that are in our midst and whose performance has now been hit with the usual causes of failure of these sorts of entities, including:

  1. Politically motivated investment
  2. Forced government subsidies or protectionist behavior
  3. Corruption
The “poster child” for this negative outcome is Petrobras, the Brazilian oil company, which is 64% owned by the state.  Petrobras was briefly the 4th most valuable company in the world after their 2010 IPO; now it is barely in the top 100.  Petrobras hits all these typical failure points with a vengeance.  The government forced them to purchase goods and services from inefficient Brazilian suppliers, subsidized their citizens with Petrobras funds, pushed them to invest in deep offshore finds which were risky relative to the company’s capabilities, and finally just engaged in simple corruption to fund their political party candidates.  All of these actions weakened the company and now a downturn in oil prices and a heavy debt load put the company in a seriously bad state.

In China, the role of the SOE has been declining and the role of private sector companies is on the rise; case in point is Alibaba which listed in the US and has been a smashingly successful IPO.  Russia represents the other end of the spectrum; formerly robust private companies in the Internet sector have been weakened by state controls and the SOE’s like Rosneft and Gazprom have lost 60% of their value over the last 5 years.

One of the most important “back to basics” points that we can make about economics and use for talking points and education remains that

Capitalism is the most effective economic solution and raises the wealth and happiness of its citizens more than any other alternative.

Government jobs and careers cannot exist on their own; they need to be supported by a vibrant and effective private sector and as government laws and regulations, designed to meet social objectives, strangle business, the entire society suffers.  For years’ the US had a smaller governmental sector than our competitors, but today that isn’t the case when we face competition from Asia and elsewhere.  Our European competition is barely relevant; the few world class companies there are predominantly global entities with operations everywhere.

As kids spend their years volunteering and working with non-profit groups and entities either part of the government or a virtual offshoot (education), they begin to ignore and take for granted the critical role of the private sector.  As countries get used to the performance of SEO’s and all their usual failures, they forget that the actual cause of most of those failures is the role of the state as an investor in the first place.

We need to take back the narrative on the economy from those that look at just “consumer spending” and “job creation” capabilities of the government; this sort of debt fueled and tax strangling approaches will ultimately kill the power of the private sector.  We should also praise all the innovations that come from the markets; everything from your iPhone to the cheap TV to new drugs to all new capabilities built into every car.  The social networks you follow, the food you eat, and the fact that the prices for most of those things outside the significant influence of government that fall every year.  You can contrast this with the rising costs of education, higher taxes, and general ineptitude that you see when dealing with government or socialistic enterprises.

Cross posted at LITGM

20 thoughts on “The Failure of State Sponsored Capitalism”

  1. “Capitalism” is actually a Marxist term but was useful when the distinction needs to be made. A better term that explains what is really happening is “Free Market” as that tells the ignorant more about the mechanism involved.

    One of my daughters who is a lefty and a government employee, was explaining to her younger half-sister the other night how she, the younger sister should look into a government job. That daughter has been working for an insurance brokerage and is looking for something similar. Her sister commented that the other was more interested in “Sales” and probably wasn’t cut out for a government job. Interesting term.

  2. There is no difference between the Communist controlled economies of the Soviet Union or Cuba and a modern regulated ‘capitalist’ economy run by crony capitalists and wealthy rulers in the Executive, Legislative and Regulatory branches. USA citizens have endured an 8 year depression while being bombarded with propaganda based on false statistics that tell them they have jobs, riches and stable prices. Only the crony capitalists in the USA, in Europe, in China, in Cuba and in Ukraine are getting richer. Vastly richer.

    Free economies can’t work unless they are free.

  3. Right Grey Eagle. They are exactly the same.

    What you miss is that the shale revolution was created here and by actual entrepreneurs and capitalists. The shale revolution that is bringing down the tired dictators in their various forms in Russia, the middle east, and South America.

    The technology revolution was created in Silicon Valley and is powered there. The new technology revolution out of China in the areas of the economy that are free while the state sponsored part is strangling the economy.

    Natural gas too is changing the world. The other half of the shale revolution is now bringing down prices of gas elsewhere, hitting other dictators.

    Russia had a chance and entrepreneurs. They could have invented this all too. Putin snuffed out the oligarchs too soon – they hadn’t brought all the new ideas and technology from the west yet, and the Russian tech firms had enough of their own. But he wanted consolidation and money for his cronies, and that’s what he got, and now he’s finally figured out that he needs to shut down the tech companies too.

    Chinese entrepreneurs always thrived throughout Asia or where ever they were allowed to compete (look at Singapore) and finally they took the boot off their own people’s neck and all the sudden the country booms. Same thing could happen to Russia – they have top technical talent and powerful connections to other successful businesses – but Putin when the other way.

    The US will be free. It will happen state by state. It will happen when we face real challenges on debt. And we have to pull back from wars everywhere that bleed us dry. But we will get our crap together and leverage the vast benefits we have – huge agricultural and water resources, natural minerals and gas, and the best universities in the world.

  4. Carl, I agree but worry at the huge dependent culture the Democrats are building. I really wonder at the political naiveté of the Silicone Valley people.

    I read one time that a rich entrepreneur said he supported Democrats because his wife was very pro-abortion.

    My own limited experience with political lefties suggests that all they care about are social issues.

    Then, of course, there are the crony capitalists and rent seekers. Before the GOP gets too wrapped up in outreach to the black middle class, stop and think a moment about how large a proportion are government employees.

    “Throughout history, poverty is the normal condition of man. Advances which permit this norm to be exceeded—here and there, now and then—are the work of an extremely small minority, frequently despised, often condemned, and almost always opposed by all right-thinking people. Whenever this tiny minority is kept from creating, or (as sometimes happens) is driven out of a society, the people then slip back into abject poverty.
    This is known as ‘bad luck’.”

    – Robert A. Heinlein

    Happy New Year to everyone here.

  5. State Capitalism works for the State and Favored Capitalists.

    Hence it works. For them, and they don’t see the rest of us as anything but “revenue”, their term for other humans who exist to serve them.

    Happy New Year.

    And #BlueisTurning which is a shifting of Tectonic Plates under Power’s [and our] Feet.

    The earthquake is now certain.

    Happier New Year.

  6. “We need to take back the narrative on the economy … .”

    We do.

    We will be fighting two generations of indoctrination.

    The good news is, the lies will be increasingly obvious as the current model fails.

    China is held out as the poster child for state-directed development. The waste, corruption and misdirected development in China is a story that will become increasingly apparent in the years ahead.

    Fortunately also, there are many millions of people who know better, know the narrative is crap, and many of them are articulate and willing to speak out, and increasingly have the facilities to do so.

    This blog is a participant in that process.

  7. Another good example is Areva, the nuclear power equipment supplier owned by the French government.

    I will grant space for government owned enterprises where they are small-scale, answerable to voters directly, and providing infrastructure needs. My prime example is municipal utilities. Not saying they are necessarily the most efficient, just that they seldom go too far astray.

  8. “municipal utilities … seldom go too far astray”: a counterexample was the way that town councils in Britain obstructed electrification, because they saw it as a competitor to their own gas works.

  9. Narrative is set by Power.

    Take back the narrative. The narrative means nothing, it’s held by power. The narrative was decisively refuted 1920’s [failed harvests, famine, beginning of disillusionment] through the Second International and the expulsion of the Communists from the very labor movement they founded [CIO], Stalin, 1937, 1940 pact, 1956, 1968, 1989.

    And yet here it is again. No one believes in it, it has power, hence the narrative. Which is held by power. Convincing people something doesn’t work for a society when it provides them personally with a 6 figure income, pension, many other benefits and flat out privileges isn’t a tough sell, it’s an impossible one.

    “You cannot ignore the question of interest.” – the only recorded words by George Washington, Presiding Officer of Philadelphia Constitutional convention, President heir apparent to a political arrangement that would have him and only him as President.

    You cannot ignore the question of interest. If you don’t believe me look at your paycheck, or pension check, or social security, or medicare and so on.

    There is no narrative that overwrites interest. There is no personal belief system in particular one that’s rational that won’t be overwritten to meet self interest. You are asking more integrity and sacrifice than George Washington himself practiced.

    Learn what’s important, it’s always been power. There are many kinds of power, fear to touch you and by extension yours is personal power. You can’t save the world but you can save yourself and yours.

    Learn. Happy 2015.

  10. “they seldom go too far astray.”

    The story of the Los Angeles Department of Water and Power is a counter example.

    The Los Angeles Department of Water and Power has directed an estimated $40 million in ratepayer money to two nonprofit groups charged with improving relations with the utility’s largest employee union, but the agency claims to have scant information on how the public funds have been spent.

    The Joint Training Institute and the Joint Safety Institute, controlled by DWP managers and union leaders, have received up to $4 million per year since their creation more than a decade ago after a contentious round of job cutbacks at one of the nation’s largest municipal utilities.

    This is a slush fund for the DWP managers and the union.

  11. I would magnify Carl’s statement:

    “… a lack of understanding of how markets actually work has become commonplace”


    “A lack of understanding of how most everything actually works has become commonplace.”

  12. I agree. I don’t see boys working with tools anymore. Some are, obviously, but it does not seem to be as common as when I was a boy. I have two sons, one a fireman and the other a lawyer. The lawyer does not seem to be competent with tools from what I can see. The younger one does some work around the house but I don’t think he does as much as I did and certainly not as much as my father did. I can still remember smashing my thumb with a hammer when I was five or less.

    I rewired a sailboat about 9 years ago. Later, I was selling the boat after I discovered that my physical state would not let me handle a 40 foot boat anymore (I should have known better). A well known sailmaker was interested but did not want to worry about the wiring and wanted a professional electrician to do it, which would have cost $5000. He wound up buying an older boat that not not been restored. A fireman bought mine and is enjoying it.

    Nobody seems competent to do these fairly simple things anymore. Wiring a boat is much easier than wiring a house, which I would not attempt.

    When I applied for the surgical residency in 1966, only one faculty member asked me if I worked with tools or played a musical instrument. I should think that a basic skill for a person who will work with their hands. I have seen an awful lot of clumsy surgeons.

  13. Granted that LADWP is a bad case of a muni run amok.

    But that organization does not meet two of my three provisios – “they are small-scale, [and] answerable to voters directly…”

    Their worst failing is that the voters they remotely answer to are Californians. Sacramento Municipal Utility District has the same basic problem.

    As to a British town council opposing electrification, they did have a sunk investment and preserving it could have been a rational choice. In any case, did the voters insist on electrification? I can also see waiting out the early problems – waiting for AC rather than jumping into a DC system as Chicago, San Francisco, and New York did.

  14. @Whitehall, I know little more than I said, but WKPD reveals:

    “The first central station providing public power is believed to be one at Godalming, Surrey, U.K. autumn 1881. The system was proposed after the town failed to reach an agreement on the rate charged by the gas company, so the town council decided to use electricity.”

    That it started with a town council that didn’t own its own gas works is consistent with my fragment of knowledge reported above.

    “The first large scale central distribution supply plant was opened at Holborn Viaduct in London in 1882. Equipped with 1000 incandescent lightbulbs that replaced the older gas lighting, the station lit up Holborn Circus including the offices of the General Post Office and the famous City Temple church. The supply was a direct current at 110V; due to power loss in the copper wires, this amounted to 100V for the customer.”

    As you mentioned might be true, it started with DC.

    “Within weeks, a parliamentary committee recommended passage of the landmark 1882 Electric Lighting Act, which allowed the licensing of persons, companies or local authorities to supply electricity for any public or private purposes.”

    Golly, government could get its skates on in those days.

  15. >>The Los Angeles Department of Water and Power has directed an estimated $40 million in ratepayer money to two nonprofit groups…

    In this case, I suspect non-profit means no profit is reported, everything is an expense. I wonder what salaries are at the non-profit?

    They know their audience though. To Left Coasties, profit is a dirty word. Non-profits therefore do ‘good’ work. Whether the service is delivered well or competitively or is even needed at all are not questions that good people ask. How many people have heard the “I don’t want some hospital making a profit on my illness!” canard?

  16. As is widely known, the argument for government owned utilities is the obvious waste of duplicating delivery structure, a huge capital cost, that would make competition inefficient compared to a single provider. The options are regulated provider with the problem of capture and controlling costs based on regulated return on investment or government owned with the problem of even greater inefficiency and lack of cost and service accountability.

    The issue of diversion of revenue to other uses unrelated to the activity was a factor of government ownership that I hadn’t thought was a major issue. I was wrong. In the city I live in, the city utility account is required to remit to the general revenue receipts 10% of gross utility payments. This is not at all transparent to voters and of no apparent interest to the media. This revenue is effectively a slush fund that avoids many legal requirements for use and accountability of tax revenue. This revenue diversion represents roughly the equivalent of 10% of property taxes.

    Texas has deregulated electrical service provider service to promote competition and lower rates. It works, at least unless you are in a locality where the city owns the utility services. No choice for us, but the county customers have at least three viable choices and enjoy rates 15 to 25 percent lower than we do. So the cost of city ownership is even higher than the 10% diversion.

    One option that has shown promise if competition for the market where companies bid for provision of the service area for a period of several years, but the ownership of the infrastructure and other large ticket capital is retained by the government. Frequent contract rebidding helps keep labor and management costs low. While incentives to maintain and upgrade the capital goods is tricky, the net effect should be more efficient than either regulated monopoly or government owned and operated.


  17. It’s an uphill battle convincing kids that private sector work is just as noble as public sector jobs when the pay scale & benefits are 50% greater or more working for the government.

  18. The period 1890 to 1930 was an amazing 40 years in American History. A movie “Cimarron” won the Best Picture Oscar in 1930. It documents the massive technology changes that took place in these 40 years. Cars were invented and the auto industry mushroomed. Power plants were invented, dams built and the country was electrified. And got gas lights and oil heat. The oil industry grew to power industries. Air planes were invented and mass produced. Railroads grew across the entire country. Farm equipment, sewers, barges…the list of new inventions and news industries is amazing.

    But suppose our current federal government with all its bureaucrats, laws, regulations, agencies, inspectors had existed in 1890. Would any of the changes have happened under current 2014 rules.

    No. Today our population would be at the 1890 level – if harvests were good; we would ride horses if we were rich, and trade recipes for making candles. Environmentalists would have blocked oil wells, dams, power plants, and made everything west of the Mississippi a national park (see Alaska).

  19. “deregulated electrical service provider service to promote competition and lower rates.”

    In California, one attraction of solar energy was the possibility of reducing utility bills and even allowing, on sunny days, the meter running in reverse as the solar source created more electricity than was bing used. The utilities quickly brought up legislation to ban reverse metering. Instead we got “smart meters” so the utility could shut down our air conditioning on hot days when capacity was approached. Much better than adding capacity when the planet is in danger from CO2.

  20. Reverse metering is grossly unjust. Look around Silicon Valley and all the McMansions are covered with solar PV panels. But who is paying for them? The actual production cost is far higher than the retail prices but between the tax writeoffs and the reverse metering, or at least meter offsets, the poor peons in the rental apartments are the ones paying through higher rates.

    Deregulation has not done much to lower rates either, if at all. It did faciliate the installation of high efficiency, combustion gas turbines burning cheap natural gas. It also put pressure on the utility labor unions.

    Try doing a detailed look at your utility bills some day. They have becomen, as Mike noted, hidden tax collection streams. Add it the affirmative action and other concessions and politicians use your utilities as another way to buy votes without you noticing.

Comments are closed.