The Political Economy of Waste (4): Waste through overhead and accounting systems

Kevin Carson wrote an excellent study on how much of our economy is actually unproductive and non-contributive.

You can read the full text here. And here is our wiki entry.

We present now it’s typology elements:

Waste From Mandated Capital Outlays and Overhead

“In addition to crowding out lower-cost alternatives by rendering high-cost means artificially competitive through input subsidies, the state also promotes radical monopoly by mandating capital outlays and overhead costs over and above what is technically required for undertaking production. Laws imposing artificially high capital outlays for market entry have exactly the same effect as making capital artificially scarce and expensive.

At the local level, one of the central functions of so-called “health” and “safety” codes, and occupational licensing, is to prevent people from using idle capacity (or “spare cycles”) of tools they already own, and thereby transforming them into capital goods for productive use. Such regulations mandate minimum levels of overhead (for example, by outlawing a restaurant run out of one’s own home, and requiring the use of industrial-sized ovens, refrigerators, dishwashers, etc.), so that the only way to service the overhead and remain in business is to engage in large batch production.

You can’t do just a few thousand dollars worth of business a year, because the state mandates capital equipment on the scale required for a large-scale business if you engage in the business at all.

– In the absence of licensure, zoning, and other regulations, how many people would start a restaurant today if all they needed was their living room and their kitchen? How many people would start a beauty salon today if all they needed was a chair and some scissors, combs, gels, and so on? How many people would start a taxi service today if all they needed was a car and a cell phone? How many people would start a day care service today if a bunch of working parents could simply get together and pool their resources to pay a few of their number to take care of the children of the rest? These are not the sorts of small businesses that receive SBIR awards; they are the sorts of small businesses that get hammered down by the full strength of the state whenever they dare to make an appearance without threading the lengthy and costly maze of the state’s permission process.

Zoning laws, likewise, criminalize low-overhead enterprise by compelling the microentrepreneur to pay expensive rents on a free-standing building in the commercial district instead of operating out of her home. The rent, like capital outlays for mandated industrial-sized equipment, can only be amortized by large batch production. ”

Accounting Systems and Broken Windows

“”A large share of what’s conventionally counted as “output” consists of waste production. Many areas of our national life are governed by accounting systems that count the consumption of inputs as an output.

For example, economists’ calculation of the Gross Domestic Product is a textbook illustration of the “broken window fallacy.” That fallacy, according to Frederic Bastiat, is the belief that a broke window is good because it creates work and revenue for the glaziers. True, said Bastiat, it employ glaziers. But that does not mean that the breaking of windows is a good thing; the owner of the broke window simply spends money to wind up in the same state that he would have been for free had the window not been broken at all. “Society loses the value of objects unnecessarily destroyed….”

As the authors of Natural Capitalism point out, anything that involves an expenditure of money adds to the GDP.

Jonathan Rowe writes:

The GDP is simply a gross measure of market activity, of money changing hands. It makes no distinction whatsoever between the desirable and the undesirable, or costs and gain. On top of that, it looks only at the portion of reality that economists choose to acknowledge—the part involved in monetary transactions. The crucial economic functions performed in the household and volunteer sectors go entirely unreckoned. As a result the GDP not only masks the breakdown of the social structure and the natural habitats upon which the economy—and life itself—ultimately depend; worse, it portrays such breakdown as economic gain.

The internal accounting mechanism of the large corporation is similar to that entailed in calculating GDP, in that it counts expenditure on inputs as the creation of wealth. Given the pervasiveness of stat cartelization, a major share of the economy is made up of oligopoly markets dominated by a handful o firms. Because oligopoly firms tend to be “price-givers” rather than “price-takers,” and to be able t pass their costs on as a markup to the consumer via administered pricing, they are largely insulated from competitive pressure for minimizing costs.

The dominant firms in an oligopoly market usually have similar internal cultures in most regards, and are likely to follow the same “best practices.” Many such aspects of their business models aren’t matters for competition, because they are based on the same set of unquestioned assumptions common to the institutional culture of the entire industry.

Large corporations are also frequently isolated from pressures to minimize costs because of the superfluity of capital available for investment. Large corporations are rarely dependent either on new stock issues or capital markets to finance new investment, choosing instead to finance expansion of capacity or upgrades of plant and equipment through retained earnings. But as Martin Hellwig pointed out, far from serving as a constraint or imposing the need to ration investment, the value of retained earnings often exceeds the total value of opportunities for rational investment.Under such circumstances, the firm may well overinvest or be prodigal in the use of its funds for the sake of internal empire-building, rather than issue the surplus as dividends.

As with GDP calculations, Robin Marris wrote, the bureaucratic culture of the corporation is likely to divert emphasis from the character of the goods and services produced to the skill with which these activities are organized…. The concept of consumer need disappears, and the only question of interest… is whether a sufficient number of consumers, irrespective of their “real need” can be persuaded to buy [a proposed new product].”

The result, as in the calculational chaos of the old Soviet Union, is not that technical progress stop or that production of a kind takes place, but that enormous sums are spent on capital outlays with n reliable way of knowing whether the expenditure was worth it. The large corporation is riddled with the same irrationality and uneven development that plagued the USSR. ”

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