Nations and Corporations: Parallel Decadence

It can sometimes be an interesting exercise to compare countries with corporations.  Not in the usual sense that dimwitted Social Justice Warriors do when they compare a company’s market capital (a stock) with a country’s GDP (a flow).  You might as well compare a lake with a river (and iif you’re a SJW, express concern that the Rio Grande is bigger than Crater Lake).  On this point, Tim Worstall explains all.

No, I’m thinking more along the lines of how an entity – be it a nation or a corporation – changes as it gets wealthier.  I have long subscribed to the view that, in the developed Western nations, we solved the major issues facing mankind several decades ago: infant mortality, hunger, disease, poverty (the genuine kind, not the SJW “relative poverty”), and deadly violence.  Nobody of my generation died of malnutrition, treatable disease, or sectarian violence outside of a (statistically) few extreme cases.  By historical standards, those who were born in the West after about 1960-70 were the wealthiest, safest, and most fortunate people ever to have lived.  Several factors contributed to this situation. The guns falling silent after WWII followed by a Cold War which thankfully never got hot was probably the most important.  The Western nations becoming wealthy was probably the second most important.

Wealth delivers incomparable benefits to a population.  The portion of monthly income required to adequately feed a family declines as food gets cheaper (being wealthy is not just about earning more: if the prices of goods and services go down relative to earnings, one is wealthier also).  This frees up money for other, secondary requirements such as better clothes, central heating, medicines, and labour-saving devices such as washing machines and cars.  If the monthly income allows a family to be fed, warm, and not exhausted through physical exertion, any surplus can be spent on things like education, healthier food, pension funds, and other things which we nowadays consider necessities but until recently were out of reach to most people in the West, and remain so for much of the developing world.  Once people are wealthy enough to have all these requirements taken care of, the surplus cash can be splashed around in iPhones, skiing holidays, cable packages, musical instruments, and other luxuries.

However, the surplus wealth does not just get spent on personal luxuries.  As a country gets wealthier, the government finds itself able to raise more in taxes and hence has more money to spend on things we all like, such as a functioning judiciary, a police force, and vaccination programmes.  But as the country gets wealthier still, the government is able to spend more and more (in absolute terms, leaving the relative expenditure alone for the sake of this argument), again on some things we all like but also on some things which some of us might not like – such as an Olympic Games, or subsidies for a theatre.

There are several ways a countries can get wealthy, but in the Western nations they have done so basically in two ways:

1. By producing goods and services which add value, the added value being proven by the fact that somebody has voluntarily parted with their money to purchase it.

2. By taking part in the globalised, diverse marketplace where comparative advantage has allowed customers access to astonishingly cheap (by historical standards) goods and services while those who produce said goods and services have also gotten wealthier at the same time.

As Westerners saw their collective wealth increase, they surrendered more of the surplus to governments who spent it on improving essential services but, increasingly, on luxuries which, historically, they have gone without.  The pre-WWII Western governments did not include departments for sport and culture and spend taxpayers’ money subsidising artists because there simply wasn’t the surplus wealth to pay for it: people were spending most of their income on feeding their children and putting clothes on their backs, and the meagre surplus they handed over in taxes was spent on things like defence of the realm and the salaries of those who ran the judiciary.  I’m simplifying here: I’m sure you could find examples of wasteful expenditure in every government going back to Roman times, and then some.  But you get my point.

The problem Western nations now have is twofold, and brought about by three successive generations of Westerners who have found themselves fully fed, clothed, housed, healthy, educated, and blessed with luxuries unseen by anyone else in history (one word to those who doubt this: dentistry).  Spoiled rotten, in other words.

1. Goods and services which until recently didn’t exist, and later were seen as luxuries, are now considered to be essential.  This is why you see people protesting about cuts to the sums that governments spend subsidising theatre groups, and why government cuts of any kind are opposed by huge swathes of the population.

2. An increasing percentage of the voting population do not understand how the wealth that pays for their historically high standard of living is generated.  The link between individuals and companies adding value in the provision of goods and services, and the money governments have to spend on luxuries via taxation of that added value, is poorly understood.

Having never seen wholesale malnutrition, destitution, and death, the populations of Western nations believe their standard of living is inevitable, as irrevocable as being born.  Fewer and fewer grasp the mechanism by which their standard of living is a result of a section of the population spending their time, efforts, and capital to produce something of value, something that people want to buy with their own money.  Therefore, the populations do not consider this when introducing and voting for policies which have a detrimental effect on the very mechanism which has afforded them the luxury of having the time and money to implement these policies in the first place.

A good example is renewable energy, so beloved of Western populations who vote in their droves for governments to spend more taxpayers’ money on windmills.  The availability of cheap, reliable energy – particularly electricity – to so many people is one of the most incredible technological achievements in human history, and has probably contributed more to the wealth and elevated living standards enjoyed by Western citizens than anything else.  That nobody of my generation, or those of my children, know what it’s like to sit shivering in the dark at home once the sun sets has led them to take for granted the enormous efforts that their forebears put into ensuring they did not have to.  They lead lives of such wealth and luxury that pontificating over a potential rise in global average temperatures is considered a more worthy and valuable activity than generating the electricity that powers their entire way of life, and without which most would almost certainly die within weeks.  They believe that taking money from people who add value providing essential things like reliable power – thus making it more expensive for consumers – and spending it on things like windmills (which don’t provide reliable power) results in a net positive outcome for society as a whole.

The West has therefore found itself using its incredible wealth to enact policies which will reduce that wealth, and if continued unchecked will end up – like Greece.  The Hellenic nation has managed to boot the can a bit further along the road, but eventually, if they intend to survive as a population and a country (and this applies equally to the clowns in other countries who keep bailing them out with their own taxpayers’ money), they will have to radically alter the way they structure themselves such that enough of their number are producing goods and services that people want to pay for.  Will they do it?  I don’t know.  But I do know that the continued existence of countries, and even entire populations, is not something which has historically been guaranteed.

So what’s this got to do with corporations? As companies get bigger and more profitable, more of the excess cash they generate gets ploughed back into the organisation in one form or the other.  Some of these are good, such as higher salaries, better facilities, more reliable equipment, etc.  But almost inevitably as companies get richer they increase their headcount, creating more and more positions which become increasingly removed from the activities which add value and generate the revenues.  Personnel management gets taken away from the departmental managers and handed to a new entity called HR.  Before too long there is an HR director on the board.  Procurement divisions are created which exist to ensure certain processes are followed seemingly in complete isolation of what is required when, where, and by whom.  Health and Safety departments are enlarged beyond those personnel required to stop people being killed or injured as they switch their focus to public relations and avoiding imaginary lawsuits.  Finance departments put a higher priority on simplifying their tax submissions than facilitating the work actually being carried out.  With enough time, even the managers of the front-line departments become unable to separate that which represents a direct cost from an overhead, and start making catastrophic decisions which appease the interests of the latter at the expense of the former.  The end point is a company which employs thousands of people as overheads supported by an ever-dwindling band of those who add saleable value, the revenues start to decline, and the company collapses under its own weight into bankruptcy.

I could name several companies which I think are closing in on this final point, whether they realise it or not.  It ought to be the duty of every director and manager from the CEO down to constantly remind all employees of the core business of the company which brings in the revenues, and have those employed directly in these activities recognised, supported, and rewarded.  Bizarrely, and surely to their eventual cost, it often appears to be a company’s overhead staff which are granted the ear of the senior management and lavished with the plushest offices and most handsome salaries, and those who deliver the goods and services treated the most poorly.

“Everything is under control.”

Share

6 Responses to Nations and Corporations: Parallel Decadence

  1. Alex K. says:

    Worstall objects to a more subtle error, comparing a company’s turnover to a nation’s GDP. Since the GDP measures total value added by an economy, it roughly corresponds to a corporation’s net profit with the wage expense added back.

  2. dearieme says:

    “it often appears to be a company’s overhead staff which are granted the ear of the senior management”: it’s like court favourites having the ear of the King while the remaining feudal nobility have to fight his wars. It’s not so bad when the favourite is an able chap like Thomas Cromwell, but disastrous when it’s some catamite that the King has taken a fancy to, or some frivolous, extravagant fop.

  3. Rob Fisher says:

    What an excellent article. Much of the top half I have been proselytising myself, with less eloquence: we’re rich and we need more people to get richer, and that means food and electricity so stop worrying about nonsense like climate.

    The bottom half has me appraising my employer. Thankfully I think they are doing a lot of things right for a large organisation.

  4. Pingback: Oilfield Expat « Samizdata