Wednesday, November 4, 2009

Niall Ferguson Smacking Down Cliched Bullshit And Some Rambling

FLG saw a video, albeit heavily edited, from an event at the New York Public Library where Niall Ferguson called bullshit on Indra Nooyi, Pepsico's CEO, who repeated some nonsense about innovative public-private partnerships, with a rebuttal that the public-private partnership between Goldman Sachs and the Government is making him feel like a Marxist-Leninist.* FLG is still trying to find the video on teh Interwebz somewhere.

UPDATE: Somebody, probably The Ancient because it seems like something he would have seen as well, posted a link in the comments to the clip I saw.

Until then, a couple of points. FLG actually has a lot of respect for Ms. Nooyi. She's a bright lady. Trouble is that at heart she's a technocratic bureaucrat, not a tremendously visionary leader.

Technocratic bureaucrats love the idea of public-private partnerships. They believe that these partnerships can bring the best of both worlds. Growth from private enterprise and reduced risk from public involvement. Sometimes it works out. Oftentimes it results in a clusterfuck.

The private and public sectors have different motivations both in theory and practice. Private sector executives and public sector officials have different personal motivations and different agency problems.

A relatively small-scale public-private development corporations to revitalize certain neighborhoods have worked. Although, many of them have succumb to the corruption introduced by sleazeball politicians trying to get a payday for them and their cronies. Larger scale public-private involvement is more problematic.

Detroit is a good example. The local, state, and federal governments along with big labor and the big three were in an explicit public-private partnership and look where it got them. Likewise, if you look to France where the government is always trying to work with corporations and other "social partners" you see that this process is not a particular efficient way to run an economy.

Big corporations and government have many reasons to want to cooperate. At one level, government gets to meddle, which they all like to do, and big corporations like to use government to create barriers to entry. At a cultural level, government is filled with bureaucrats and top-down policies and so are big corporations. This also increases predictability between the two parties. Both have a huge stake in not upsetting the status quo.

Contrast this with the small firms. They are largely entrepreneurial and haven't built up a corporate bureaucracy. On top of that, they have few resources and little time to spend dealing with government bureaucrats. They don't have internal counsel. The also grow and are disruptive to the established order. They lack the scale to offer large amounts of goodies to politicians.

Many people, especially on the Left**, find the concept of public-private partnerships appealing. It appears to be a way to manage the excesses of greed, and by extension under their logic the business cycle because it is caused by that greed. In return, the government can help provide resources to smooth out rough spots. This seemingly would create a more rational and predictable basis upon which to run an economy. Indeed, this seemed to work for during the middle part of the 20th century.

Trouble is there are a huge amount of problems with this type of arrangement. First, getting back to the agency problem, politicians and executives have differing motivations in theory. Politicians are, if we assume the best, out for public welfare or, if we assume the worst, their own enrichment and power. We pretty much assume the worst, self-interest, in the case of corporations in any case. Executives are trying to maximize corporate profits and enrich themselves. Rarely do these motivations align. Second, and more of a subtype of the previous point, but politicians have a parochial and make work bias. They want jobs in their district. To the extent that the personal power of individual political operatives can distort the employment decisions of corporations, they screw up the economy. Third, this may have worked in an industrial economy, but it looks far less effective in a information economy. Industrial production requires huge amounts of physical capital. Therefore, there are natural economies of scale. These economies of scale lead to large corporations that can build large factories with jobs that politicians like and they also permit the creation of bureaucracies to manage the process. An information economy where me and my dog can create a website in my basement that explodes overnight isn't the type of economy that lends itself well to top down, command and control public-private partnerships.

It's really a fundamental question of risk versus reward. Those who view our economy as one that constantly and irrationally torments innocent people and creates unnecessary fear and chaos, broadly speaking the Left, would surely like to rationalize and temper these torments. The two most common solutions are unionization and government involvement. Those who view our economy as dynamic and innovative, broadly speaking the Right, expect that individuals will reap the benefits of this economy and rationally prepare for its fluctuations through personal responsibility and savings.

Both sides have a point. Trying to wring the uncertainty out of the system necessarily inhibits innovation. Alternatively, individuals don't always act rationally or responsibly. It's really an individual judgement about where the best place to draw the line is. However, what FLG finds concerning and interesting is the bureaucratic/corporate dynamic that bring big business in line with big government and tries to protect the status quo at the expense of smaller, more innovative firms.

* Maximum Leader: Sorry, I forgot to email you back about going to see Ferguson, and I ended up going to the Supreme Court that day.
** Although, capitalist pigs on the Right lined up to get government cheese lately too.


George Pal said...

“They believe that these partnerships can bring the best of both worlds.”

Cupidity and stupidity are never so bad as when they are institutionalized, legalized, and protected by private-public partnerships.

Anonymous said...

The Maximum Leader said...

No problem. It turned out that the day was a crazy one for me.

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