Eric Harrington – Profit of Change

With all the hullaballoo about Socialism these days — and the suggestion that if the government nationalizes a bank, we have leapt out onto the slippery slope of Socialism and it’s ultimate destination Communism — I can’t help but bring up a little nuance in the argument. Namely, that Banks are Socialism…

 That’s right; banks are inherently socialist operations by nature. So are Insurance companies.  By definition, Socialism is NOT communism; it is not a system where everything is owned by the state or communal. It is simply a system that recognizes that the greater good cannot be served purely through the selfishness of the free market and individualism.  It accepts that certain aspects of life and business in a civilization, i.e. a group of people trying to live together, are better handled communally, serving the interests of the whole, while others are best left to the individual.

 So how are banks and insurance companies socialist?  Both industries pool the resources of the many to reduce the risk or cost to the individual.  That is Socialism — pooling the resources of the whole to average out the risk of the individual.  And ultimately, when the losses becomes too large for either of these industries, it is always the government who has to ultimately back them, or bail them out, as in a major disaster or market crash. So why even bother to have these industries private?  Why not nationalize them, since it’s the government that always seems to have to cut the last check?  Why pay an insurance company 20-30% in profit for doing NOTHING but pooling our money and then figuring out ways to deny us coverage to increase their profit?  Why pay banks huge profits to pool OUR money, then literally create and loan 9 times more of OUR money than they have in assets back to us with interest?  These industries are really just Socialism bundled up in a free market wrapper, a wrapper that cost 20-30% more on average.

 So what really do we lose in socializing these industries? The Republican mantra that the government can do nothing efficiently,  always seems to be then supported by examples of  services the government provides that do NOT do fit the socialist model. Postal services, road repair, etc…, etc…, much of what Government does for us really is better suited for the private sector, and competition. But our military runs like a well oiled machine. Why? Because no expense is spared as it is not subject to free-market profit pressures. Insurance on the other hand, is a perfect fit for nationalization, for it provides no real value outside of the pooling of wealth, something the government does best because it has the most money, and in the worst case, can create it.  A perfect example is Medicare. Medicare costs 8% to operate. That includes everything. Most insurance companies have similar if not higher expenses and then charge 20+% profits on top. And they provide no real value, except to pool OUR money or risk.

I recently read a quote that said, “Insurance companies suggest that a Government health plan operated  at cost would make it “impossible for Insurance companies to compete”   Haven’t we been told by all the free-market fundamentalists that competition brings costs down?  SO now we have the Insurance industry claiming they can’t compete with a non-profit Government program..  And they are right, but the reason they differ from many other types of industries is they PROVIDE NO VALUE FOR THEIR PROFIT..  Profit incentive CAN make companies more competitive, when there is the opportunity for invention, innovation, or technological discovery.  But the only thing insurance companies can do to increase their profits is raise prices or deny coverage. Thus this industry should NOT be for-profit.  Especially not when it’s deemed a necessity like health, fire or auto insurance.  The Government should implement national not-for-profit insurance companies and banks and let the for-profit guys try to compete. If they can’t, than they don’t deserve to exist. That’s the Free-Market Mantra or am I missing something.

 And in the case of the banks, there is another serious problem that is eliminated with nationalization.  Industries inherently grow by nature, consuming smaller businesses along their path until they become so large, they become To Big To Fail.. They become so vital a part of the machinery of commerce they cannot be allowed to fail, no matter how badly they perform, and this protection from failure all but insures they will NOT perform in the end.  Failure is a vital part of a functioning free market, for it culls the herd.  The market does not work, if ALL participants are not allowed to fail when no longer competitive.  The same TBTF argument holds true for all industries absolutely critical to a healthy economy, such as utilities and regulatory agencies.  Stability is more important than cost, when it comes to these critical path services. Why regulate them to death to keep them stable?  Nationalize them and remove the profit aspect completely. Force them to provide services to the public at cost. They can still be run like any other non-profit company. They don’t have to be repositories for mediocrity like so many government services. That is a result of poor structure, not an inherent function of non-profits or nationalized business.  Non-profit Hospitals are traditionally much better hospitals than their for-profit competitors, proof that profit isn’t necessary for a quality company..  And profit inherently places the companies focus on the investors,  not on the welfare of the employees or even the customer in many cases.

If we have learned anything from the recent crash, it is that stability is more important than cost when it comes to critical services.  We also need to recognize that we can no longer put the interests of the investor above those that do the work, for it creates a destructive economic caste system..

One last note…  Another thing Socialism, (or maybe a better name would be Socialistic Capitalism) brings is the ability to prepare for the future. It is painfully clear that the Socialist governments of Europe have demonstrated far greater vision in their infrastructure development. Their levies are overdesigned. They have significant portions of their power supplied by renewable sources, even when it is more expensive. They have the power to prepare for the future, even when it is not profitable this quarter, something that is almost counterintuitive to free-market, quarterly report driven for-profit business.

 With the plethora of challenges we face in the coming decades, we need the kind of vision that comes from looking out for the whole, through Socialistic Capitalism, and not just the ruthless individualism of the Friedman-esc free market.

MORE by Eric Harrington

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~ by Eric Harrington on May 26, 2009.

One Response to “Eric Harrington – Profit of Change”

  1. Bravo! Eric, I’m impressed. So you’re not just a computer geek — HA, HA!!! — Norman Sutcliffe

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