Economic Motivation

New post on Economic Motivation

Capital Allocators: Government VS Private Sector

by chriscrubs

Background

Since this is a political post, I want to first share some personal background to clarify my views. Growing up, I never liked politics. I don’t like the divide of a right vs left side, a republican vs democrat. I find it counterproductive because of the wasted resources and energy spent on lobbying and indignant disagreement[1].

I believe in voting for policies that make the most sense for you, regardless of your affiliation or denomination. Politicians like to find ways of differentiating from the opposition even if it involves extremism. To avoid getting sucked into prejudice, all media that I consume passes through a bias filter in my brain where I try to identify and cancel out motives and manipulative messaging that intend to arouse their target audience. CNN does it, and so does Fox news.

I listen to all perspectives and then draw my own conclusions based on fact and actuality. For more ambiguous topics, I gather and interpret data from all sides and then form a conclusion that I believe best accommodates my personal morals, values, and vision for the world. My opinions for policy are what I believe are the best actions to make the world better and with more equal opportunity. This is based on my current understanding of the world which changes over time. I don’t consider myself to be on the right-left spectrum, rather, I vote for the policy of progress.

Stuff

Stuff is created by people. If people didn’t build stuff then we would not have it. This stuff includes technologies, products, and services. Technology is a technique. It’s the way we all do things. When you discover a new way to do things, its value is multiplied by all the people who use it. A product is an item that can be physical or digital. Products are made at a cost and sold at a price for a consumer to use. A product can also be a service. Services entail doing what a customer would actually like to have done; it is the production of an essentially intangible benefit. The service industry contributes the most to our GDP and embodies anytime someone offers their knowledge and time to improve performance, productivity, potential, and sustainability. It involves activities beginning from the production of goods and service until it reaches the consumer.

We take for granted how much better life is now with all our advancements than even just ten years ago—let alone fifty or a hundred years ago. Grocery stores, for example, are amazing when we look at the value they provide. Medical advancements have increased our life expectancy by 112% in the past fifty years. We can communicate with anyone around the world in real-time with a device in the palm of our hands. All of this stuff was created by people, and it wouldn’t exist if people didn’t create, maintain, and manage it.

Our world has two players who can make this stuff: the government (public sector) and entrepreneurs (private sector). The public sector has its pros and cons as does the private sector. The intent of the government is to act as a public-spirited steward of resources and is empowered to ensure that all of society benefits from the profits a dynamic economy generates. On the surface, it has good intentions and good merit in what it does for society. We do need a government to function. They referee our economic and societal activity to enforce fairness and constitutional activity amongst other things.

Legislation and rule-setting aside, the public and private sectors both want to improve and advance society. The government seeks to achieve this by doing the most good for the most people. The private sector has the same overarching goal but is fragmented into millions of different parts[2], each focusing on a specific product, service, or advancement. Tesla is a [private sector] entity with the mission of accelerating the world’s transition to sustainable energy. The government has been working on the same thing.

The government has the most secure reoccurring revenue in the world via American taxpayers and hence a very large budget each year to allocate that capital where they wish, with the consensus of the majority. If what they’re doing doesn’t turn out to be very valuable, they still generate revenue. The difference between a company and a government is that private sector companies live and die by the free market. A company starts when someone thinks they have a new or better way to provide value. The only way to verify if you have something people want is to offer it to them and see if they buy it. If people see the value in your product/service and are willing to pay you for it, then you’re creating wealth by providing value to society. Inversely, if nobody sees value in what you’re offering, your company dies, like natural selection.

Akin to a government, a company must generate revenue to continue to build things. However, a government generates at least some tax revenue regardless of the situation, while a company only receives revenue if customers pay them for creating something they want. This configuration forms an innate environment in the private sector to create things that are good and useful, and to use capital very carefully in doing so because it is finite.

Unless a private entity is a monopoly or is conducting fraud (both are illegal), then their product cannot be forced onto consumers. It grows in relation to its value output to customers. Since markets are always changing, businesses maintain growth by pivoting into new industries, creating new innovations, and building new products and services. In doing so, it doesn’t matter how large or how much capital an entity has to spend—creating something people want and can afford is really, really hard[3]. Large companies fail all the time at bringing new products and services to market, and that shows there is no way to bypass the process of making something people want.

Grow

All living organisms need to grow. Governments need to grow. Non-profits need to grow. If you’re not growing, you’re quite literally dying. A government grows so it can continue to serve more and more people. The US federal spending increased from $1.25 trillion in 1990 to $4.4 trillion in 2019 and $6.6 trillion in 2020. Non-profits don’t exist to donate a set amount of money and then die. They fund-raise and generate revenue so they can continue to serve and expand their operations to help even more people.

Companies are the same way, except they incentivize their instigators with unlimited potential upside. Instead of all the surplus revenue going back into the entity’s expenditures, founders and investors are entitled to a portion of the profits which can add up to very large amounts. This is where the stigma comes from. Should one person be allowed to have that much money?

Consumption vs Net Worth

When someone’s net worth exceeds tens of millions of dollars, it becomes unlikely that they’re holding that money in cash. Net worth does not equal money in the bank. Someone like Elon Musk is worth +$260 billion, but he does not have +$260 billion to spend. As of right now, most of Elon’s wealth is in Tesla stock. If and when he chooses to spend some of that wealth for personal property or personal consumption, then he would need to liquidate it by selling it to someone else. If he sold all of his shares at once, the stock price would plummet and he would only get a fraction of the +$260 billion. Elon would need to sell his shares over time because people would need to buy them from him to maintain demand and stabilize Tesla’s share price. When Elon sells, he needs to pay a capital gains tax. If he buys an expensive home, he needs to pay a percentage of the value of his home each year in property tax. If he buys an expensive car or watch, he needs to pay a sales tax which is a percentage of the price of that item. So wealthy people are sort of incentivized to hold their wealth in assets.

Wealth held in assets essentially belongs to society. Almost everything you use in this world needs to be created, maintained, (sometimes improved), and managed by someone. Investors take the risk of ownership of the asset and modify it to provide the most value to consumers. In return, the value of what they owned over the period of time may go up and be sold for more than they paid for it. The gym you go to, restaurants you eat at, stores you buy goods at, and hospitals you get treated at are all tied into someone’s “net worth” yet the owners are vilified for providing those services.

This is where I believe priorities are flawed. Personal consumption should be stigmatized but not simply a person’s net worth. The system should increase penalization for withdrawing money to buy yachts and luxury goods for personal consumption, but not for trying to build and improve useful things for society.

Government vs Private Entities as Capital Allocators

Essentially what it comes down to is who you trust and believe will be a better allocator of capital. Who is more competent to spend resources effectively and efficiently to build and manage things that people need and want? Some say that the government should control and manage our assets because they’re altruistic and have the best interest of the general population. Billionaires say that they’re better at allocating capital and building things and that they have a better track record to prove it.

One area that the private sector trumps the government is at building things that are deemed impossible at the time. The majority of technological breakthroughs and moonshots originated from private sector organizations and many received financial and legislative support from the government. The private sector is able to develop things that are not initially obviously valuable to society. Life-changing services like Uber, social media, and Airbnb would’ve never come from the public sector.

For example, the smartphone is a technology that was not a priority to the government and wasn’t really needed. After private-sector companies developed and refined smartphones, we have now multiplied our economic output and productivity by an overwhelming amount. Smartphones have also led to advancements in computer and chip technology that have benefited just about every other industry.

As with everything in this world, capitalism isn’t flawless. Too many employees are struggling to afford necessities and some industries and business leaders operate with greed. But the conscientious capitalists do a lot of good for society. While governments have a fiduciary duty to the public, they’re probably not the best option as a centralized capital allocator. The private sector is better at creating and managing assets while the government is needed to referee and support growth by stimulating or deterring certain industries that pertain to their overarching goal of doing the most good for the most people. The government is also needed in society as the enforcer of fairness through legislation.

The political debate shouldn’t be whether or not someone should have a high net worth[4]. The debate and infamy about wealth should rather be centered on how to eliminate poverty and give everyone equal opportunity—which is a lot more complex than handing out dollars[5]. Entrepreneurs are essential, as is the government, but let’s not confuse progression for inequality.


[1] Political parties are essentially groups of people who agree on certain principles or agendas and support political leaders who align with their views. People in these groups spend their money to expand their group and popularize their ideas and preferred candidates for office. Democracy can still function on a consensus basis in the absence of political parties. The aggregate diversity of opinions can still exist without a right and a left. Professor John F. Bibby, American political science professor, and writer outlines the problems with two-party partisanship in the United States in his essay.

[2] The government is one body that has interdependent organizations that work in all industries. Conversely, the private sector has many individual independent bodies, each working in different industries and on different products. The public sector has an absolute obligation to put the public’s interest before its own. Corporate directors and officers owe fiduciary duties to the corporation and its stockholders. Paradoxically, for cooperation to perform well and fulfill its fiduciary duties, it must provide a prime product or service that is of value to people.

[3] Amazon, one of the largest companies in the world failed to build a good smartphone (Fire Phone). Despite having experience in electronic hardware, more than enough capital, and plenty of data from consumers, they still failed.

[4] There is not a fixed amount of wealth in the world. Wealth has been getting created and destroyed (but on balance, created) for all of human history. It’s not a zero-sum game either. I’ve discussed in length how little excess wealth does for a person’s well-being once they have enough money for all their needs. We should direct our attention from billionaires to policies that give everyone access to basic needs and policies that nurture fairness.

[5] To fix poverty and inequality requires a self-sustainability status through education, infrastructure, and easy access to basic human needs.

Thanks to John and Denzel for reading drafts of this.



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